June 28, 2012
The ruling is in. After months of speculation the Supreme Court has decided that the Affordable Care Act is constitutional.
What this means is that Congress indeed has the power to mandate that Americans purchase healthcare insurance or pay a penalty; given that the penalties for this plan are ruled a tax, this means it is constitutional. It also prevents insurance companies from denying coverage based on pre-existing conditions. There are many legs to this, but those were the big items.
Typically, the market likes certainty and we often see rallies when big decisions are made—almost no matter what the decision is. That wasn't the case today for two main reasons.
The first and the easiest to digest reason is that the decision doesn't give the market any more certainty about the future of healthcare than we had yesterday. The truth is that we have an election in a few months and one of the parties is, to put it lightly, against the healthcare plan.
Immediately following the ruling House Majority Leader Eric Cantor said that the House of Representatives will vote to repeal the law on July 11. This is a symbolic move as there's no chance that both houses of Congress will vote to repeal at this time. But what does have some teeth are comments from Presidential candidate Mitt Romney. Just moments after the decision, Romney addressed the press and said, "As you can imagine, I disagree with the Supreme Court's decision, and I agree with the dissent. What the court did not do on its last day in session, I will do on my first day if elected President of the United States. And that is that I will act to repeal ObamaCare."
With polls showing that this election is neck-in-neck, it's obvious that this debate will continue and that there is still no certainty that the Affordable Care Act will go into effect.
The second reason the market didn't rally is a bit more complex and frightening. And that's the cost of the plan.
What most Americans don't realize is that there will be extra tax implications to the tune of 3.8% to foot the bill for the Affordable Care Act.
If you have "unearned income" through dividends, interest, rents, royalties, unemployment or the sale of a home, you will likely pay an extra 3.8% next year.
There is no skirting the fact that this level of taxation will send ripples through the economy and increase the fears of another recession.
So by now you're likely asking, "OK Louis, Is it time to exit healthcare stocks or is it time to get out of the market altogether?"
Not a chance.
I own and recommend healthcare, biotech, pharmaceutical and medical service companies and will continue to do so throughout the rest of 2012 and beyond. And I'm certainly not recommending that anyone close up shop with their investments.
What I do recommend is that investors use opportunities like today, when the indexes are down 1% or so each, to pick up shares on the cheap. I'm doing exactly that today in my private and public accounts. But I also recommend that you do so with patience and an eye on the horizon. While the going may get a little rough with holidays and vacations keeping volume low on Wall Street, we do have earnings season, election excitement and a host of other events that will bring volume back to the market and into stocks with strong fundamentals.
And don't forget that our country is in the midst of a major healthcare buying spree. According to the non-partisan Congressional Budget Office (CBO), spending on health care in America under current law will increase from $2.5 trillion or 17.5% of gross domestic product (GDP) in 2009 to $4.6 trillion in 2020! That means that healthcare spending will account for nearly a fifth of the nation's GDP.
And if the Affordable Care Act survives the election, government spending will add an additional $1.2 trillion to the pot!
That's because of the major demographic trend that ensures that Americans will spend more than ever on healthcare: The aging of America.
Every single day, 10,000 new people qualify for Medicare. That is a demographic you can't argue or legislate away. This group of Americans will need doctor's visits, medical tests and prescription drugs.
So, health care will remain a growth industry regardless of the changing political and legislative environment.
And the best way I can demonstrate the health and dangers of companies in this industry is to get right in and look at the fundamental strength of individual stocks. Here's my take on six companies that I see as having the biggest potential impact on investor's portfolios in the second half of 2012–for good and for bad.
Alexion Pharmaceuticals Inc. (ALXN), an A-rated stock in Portfolio Grader, is the biopharmaceutical company responsible for the most expensive drug in the world: Soliris, which costs patients a whopping $400,000 a year. But it is clear that doctors and patients recognize the value of Soliris. First, the only alternative to Soliris if you have a life-threatening blood disorder is a painful and risky bone marrow transplant. Second, this sophisticated treatment is a result of $800 million spent over 15 years of development.
Sales of Soliris continue to climb, up nearly 50% in the first quarter, and analysts are calling for 41% sales growth and 28% earnings growth for the company in the coming quarter. Alexion is a one-of-a-kind pharmaceutical company with one-of-a-kind profit potential.
Not all biotech companies are created equal. I rate United Therapeutics Corporation (UTHR) as a C or hold even though it has products that are of great interest to aging: Remodulin, Tyvaso, and Adcirca treat pulmonary arterial hypertension (PAH). UTHR also has other PAH drugs submitted for approval by the FDA as well as more drugs in Phase III trials.
I like the pipeline, I like the company's fundamentals—sales are expected to be up 16% this quarter and cash flow and return on equity are strong. But the company needs a big approval and some real buying pressure to get behind the stock. With out a major light shining on this stock, it's just not worth investing in at this time.
Cerner Corp.'s (CERN), a top-rated healthcare company, has products and services allow companies in the sector to reduce costs and boost their bottom lines—with rising costs in the healthcare industry, any cost-saving measures are essential. Independent experts believe that widespread adoption of modern healthcare software and IT services could cut healthcare costs by $162 billion annually. This is why Congress has provided more than $35 billion in "meaningful use" of healthcare IT incentives, giving a meaningful boost to Cerner's business.
In fact, in the first quarter, the company reported a 37% jump in earnings and 30% sales growth. For the second quarter, management now expects earnings in the range of $0.52 to $0.54 per share and sales between $620 million and $640 million. Meanwhile, analysts forecast earnings of $0.54 per share on $605.2 million in sales.
But when it comes to healthcare information services companies, I want you to steer clear of Cerner's competitor F-rated, bottom-of-the barrel-in-terms-of-fundamentals Allscripts Healthcare Solutions Inc. (MDRX). With a network of 1,500 hospitals and 180,000 physicians, Allscripts also specializes in streamlining healthcare to reduce costs and improve the patient experience. The company also offers document management services, electronic health records solutions and electronic prescribing.
However, Allscripts just hasn't been able to pull off the industry-trumping profits that Cerner has. In the last quarter, Allscripts' earnings plunged 54% compared with last year. The company also posted a massive earnings loss and cut its earnings guidance for the rest of 2012. Since that ill-fated earnings announcement, shares of MDRX have plummeted 38%. So while I give the green light for CERN, you'll want to brake for this stock.
Buy rated UnitedHealth Group Inc. (UNH) is a heavy hitter in the healthcare sector, being the largest single health carrier in the United States. In serves more than 75 million people worldwide. The company served nearly 34.4 million patients at the end of the third quarter, up about 1.7 million from a year earlier and it spent a less-than-expected 80.7% of its premium revenue on medical claims (the ratio is an important gauge of profitability).
This company also stands apart from its peers on several fronts. First, out of 23 companies in the industry, its earnings growth is ranked at fourth, its return on equity weighs in at number six and its 1.4% dividend yield is the third-highest in the industry. With a leading industry position, it is difficult to see how the solid stock performance won't continue.
On the other side is WellPoint Inc. (WLP), which is a mixed bag when it comes to fundamental strength. With nearly 34 million members this company is one of the largest providers of health benefits. Just a few days ago the company branched out by buying out 1-800 CONTACTS Inc., the largest direct-to-consumer contacts retailer in the nation. But even a big buyout like this isn't enough because WellPoint still has a lot of financial issues to resolve before it becomes a buy in my book.
In the most recent quarter, the company posted an 8% profit loss and a sales miss. While WellPoint has slightly upped its 2012 bottom line guidance, analysts aren't particularly bullish about the company's second-quarter prospects. Currently the analyst community expects the company to grow sales by less than 3% and earnings by 14%. This is beneath the industry average of 20% expected earnings growth.
In fact, today the stock gapped down after the Supreme Court's ruling while UNH has held its ground—this just comes to show which of the two companies is a much safer bet in this market.
I hope that this post has given you unique insight into what today's Supreme Court decision means to you as a taxpayer, voter and investor.
And I want you to think of investing like a marathon, not a sprint. ObamaCare will certainly be top priority for everyone for the coming months. Romney, if he's smart, will hammer this topic in his ad campaigns and fundraising activities right up to the election. And President Obama will need to continue to address the issue—as he admitted in his own address to the press and the country this afternoon.
This will keep the topic top of mind for investors, fuel uncertainty in the market and, as I mentioned earlier, stoke talk and fears of another recession alive. But, and I can't stress this enough, there are opportunities to profit in this market no matter what happens with taxes, healthcare or the election. If you keep your focus on the long-term and not panic with each news item, you'll find more success than failure in this market. And I'll continue to cover these news items and anything impacting you as an investor here in our free Daily Blog.
If you have any questions about today's decision, the reaction of the indices or about individual stocks, feel free to email me at this direct address.