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Pages of Purple Prose and a Healthcare Stock Pick

The Obamacare ruling will benefit some while others wait


The hype begins!  Yesterday, in the wake of the Supreme Court’s Obamacare decision, we heard all sorts of extravagant claims.  One wag pronounced it “the biggest investment story of the day — and possibly, the year.”  Spare us, please.

More important than the deepening recession in Europe?  More significant than the sharp slowdown in China and other emerging markets?  Weightier than the 28% plunge in oil prices since February?

I don’t think so.

For starters, the Court’s ruling(s) on the constitutionality of the Affordable Care Act don’t take the issue off the political table.  The law will remain a major bone of contention during the election campaign, and beyond.  It may still end up being substantially amended, or even repealed, in the next Congress.

Thus, I’m a good deal more circumspect in my assessment of what the ACA may mean for the healthcare industry.  I certainly wouldn’t rush, as some investors apparently did, to assume that health insurers will take it on the chin.

As the law stands, managed-care providers like Wellpoint (NYSE:WLP) will receive a huge influx of new customers from the state-sponsored insurance exchanges.  While these new folks likely won’t generate the same kind of profits as WLP’s existing business, the increase in volume should largely offset any decline in margins.

What’s more, WLP’s extremely low P/E ratio already gives you a nice, thick cushion against the unknown.  As of today’s close, the stock is quoted at barely 8X estimated 2012 earnings — a steep 35% discount to the market multiple.

Even after Obamacare was passed, WLP traded as high as 11X in the spring of 2011.   Thus, I believe the shares could rise 20%-30% in the year ahead if Wall Street merely returns to a calmer, more levelheaded appraisal of the legislation.

In the broader market yesterday, it was encouraging to see the headline stock indexes bounce from their afternoon lows.  However, we aren’t out of the woods yet.  If the European summit can show real progress on harmonizing the fiscal policies of the EU member nations, the S&P 500 may not need to probe the downside targets I talked about in Tuesday’s blog.

But there are still plenty of banana peels the market could slip on.  After today’s close, Nike (NYSE:NKE) reported surprisingly weak orders from China — up 2% from the same quarter last year, versus an expected 15%.  If the “China miracle” goes up in smoke, a lot of big U.S. companies (not just athletic-footwear makers!) will feel the heat.

So we’ll play it cautiously a little while longer.  Hedgers, keep your stops in place for ProShares UltraShort S&P 500 Fund (NYSE:SDS).

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