Look to Supplier Stocks for an Obamacare Trade

by Michael Shulman | October 3, 2013 11:18 am

Since I believe the Affordable Care Act (ACA), also known as Obamacare, is here to stay, and is already working quite well, this is the first in a hopefully long series of columns on investment opportunities missed by Wall Street and stemming from the ACA.

The Affordable Care Act (ACA) was initially branded by Republicans as Obamacare should have a new name – Investorcare — but I guess that would not have suited their purposes or made the anchors on Fox very happy.  Investors who are looking for longer-term opportunities around the ACA need not look far, but do they need to look sideways.

Do not look at insurance companies or regulated providers — price competition and uncertain success at the exchanges for individual companies makes picking winners problematic. Look to the right for product suppliers benefiting from increased volume, look to the left to companies reducing their health care costs due to employees getting a better deal at the exchanges.

First, three reasons to back up my base assumption — that the ACA is already working:

Ignore the headlines from Fox and other propaganda machines posing as news organizations that the glitches in the healthcare exchange websites are disasters and certain doom for the ACA. Wrong — glitches are happening due to incredible demand for information and health care. The bottom line for investors: more demand for medical services and medical products. And more people buying their own insurance with government subsidies, replacing policies paid for by their employers.

Wall Street has already bid up many “supplier stocks” due to the ACA. What have they missed? A great unknown company called Questcor (QCOR[1]) — a pure play on Medicaid expansion. I found Questcor (well, I did not find it, a hedge fund guy called me, as they often do) and I bought it for my own portfolio at fifty cents. Being an investment genius, I sold it at $5 dollars. It is now $59. Questcor makes a gel — Acthar — for the treatment of violent spasms from multiple sclerosis and violent infantile spasms, the latter representing more the majority of sales. When the stock was fifty cents a share, the former CEO charged $50 a vial. Now with the stock at $59, the current CEO charges closer to $30,000 a vial. Simply put, even U.S. health insurance companies do not let babies die.

And a lot of those babies are on Medicaid. Ah, now you get it. Medicaid expansion could significantly increase the demand for Acthar for use to treat babies not currently on Medicaid but will be on Medicaid. Uncle Sam gets a rebate on the list price but the treatments are sill wildly profitable.

Questcor stock is quite volatile, but cheap. The options have incredible premiums given the low volatility in the market and my thoughts are to sell QCOR puts or buy QCOR shares and sell the calls. Better still, QCOR has weekly options! You can do this every week and produce annualized returns north of 40%.

Think about it.

As of this writing, Michael Shulman did not hold a position in any of the aforementioned securities.

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  1. QCOR: http://studio-5.financialcontent.com/investplace/quote?Symbol=QCOR
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