Today's Market Observation 07.21.2009 Mon Tue Wed Thu Fri Barbera Archive

Opportunism Knocking (?) on the Demise of OBAMACARE

by Frank Barbera, CMT | july 21, 2009

For years it has been nothing less than a national embarrassment that so many individuals in the United States are unable to afford healthcare costs, and as a result, live their lives uninsured. Current estimates suggest that upward of 46 million to 47 million Americans do not have healthcare coverage. With his sweeping victory last November, President Obama put a lot of personal capital in his drive to put forth the lofty goal of extending healthcare coverage to all Americans. Unfortunately, that goal may be in jeopardy as the Congressional Budget Office recently told the Senate Budget Committee that none of the bills seen thus far would contain healthcare costs, and reduce them substantially over time. What’s more, even as President Obama is out stumping for the current healthcare bill, within his own party a coalition of conservative Blue Dog Democrats have already announced that they will not vote for the bill which is seen to be raising taxes at the worst point in an economic contraction. In the present House Bill, the goal is to expand insurance to 97% of Americans utilizing a surtax of between 1% to as much as 5.4% for families whose earnings amount to more then $350,000 per year. In a theme and variation, House Speaker Pelosi discussed applying the surtax to individuals making at least $500,000, and families making $1 million a year or more. Yet there is a good chance that with the fiscal budget exploding in the wake of the economic implosion, that healthcare reform may end up scuttled once again.

Strangely enough while the national tragedy may drag on, if yet another Administration runs aground on the rocky shoals of failed healthcare reform, for investors the demise of Obamacare may end up spelling ‘o-p-p-o-r-t-u-n-i-t-y’ as in “opportunity knocking”. Now I know, and be forewarned, that the following analysis is going to sound really crass. Unfortunately in the capital markets, sometimes there is just no way around sounding crass when making money is involved and is the stated goal. In this column, we look at the potential investment angles surrounding all sorts of different opportunities, and sometimes, by default, this requires a lot of admittedly twisted logic as this is often the lens through which the capital markets view things. Thus, for those of you who are steadfast ‘humanitarians’ and champions of thoughtful universal care, while applauding you, we ask you to temporarily take off the compassionate humanitarian hat and don the more aggressive ‘hedge fund’ investor cap. Without that type of mindset, nothing that follows will make much sense.

You see, Obamacare has already had much the same impact as “Clinton-care” would have had 16 years ago. ‘Obamacare’ has scared the capital markets silly, causing them to avoid Healthcare stocks like the plague over the last few months. Even within healthcare, there are sectors such as Big Pharma, and the Managed Care stocks that have been particularly reviled. In many cases, the stocks in the managed care sector of Healthcare now trade at prices not seen since 2004, over 5 years ago. What's more, these companies are generally super profitable and of course, therein was the great fear. Namely, that ‘Obamacare’ would make them a whole lot less profitable in the future.

By way of attempting to show just how financially sound most of these businesses are, we thought we’d walk you hard-core, quant investor types down the path a bit alongside the much derided Managed Care sector. Talk about not wanting to touch something with a proverbial ten foot pole, so far, Wall Street has largely bypassed the Managed Care stocks with most of the group turning in sub par performance since the major market low in March of this year. In the table that follows, we show the price change for a number of Managed Care issues, which by and large have failed to keep pace with the S&P.

		18-Mar	Recent
Name:		Price	Price
United Health	UNH	$21.95	$24.84	13.17
Humana	HUM	$26.36	$29.30	11.15
Aetna	AET	$24.36	$24.60	0.99
Cigna	CI	$18.56	$24.20	30.39
Amerigroup	AGP	$28.00	$27.10	-3.21
Molina	MOH	$21.10	$22.01	4.31

0721.01

Above: S&P 500 (top clip), Aetna (AET) middle clip, Relative Strength Ratio of AET to SPX lower clip. No gain in rally since the March lows for AET.

0721.02
Above: United Healthcare (UNH) middle clip versus the S&P, same dismal outcome…

What’s more, not only have these companies not really participated in the stock market rally, but in many cases, these companies are veritable fortresses of cash. Wanna see a strong business? Look at the balance sheet data for some of these companies. In the table below, I show you the current stock price along with the total amount of cold hard cash each company has on the balance sheet. I then compare the total cash to the total shares outstanding (not shown) to get the Ratio of Cash per Share. From there I then compute the total amount of cash relative to the companies' market cap. In some cases these businesses are so hated that they are selling at a discount to cash on hand which is truly remarkable. What’s more, while there are many metrics one could use for comparison, if we were to compare Cash on hand relative to Market Cap as a metric of financial strength, we do the same analysis for four leading Oil companies, all of which are rock solid businesses, but none of which has a ratio of cash to market cap anywhere near approaching the kind of ratio’s seen in the Managed Care sector. While I am not saying that these businesses are inherently stronger than Oil companies -- which are incredibly robust money-makers -- I thought the side-by-side comparison was an eye opener, and should give investors cause for a closer look.

		Share	Total	Cash	Mkt Cap	Ratio
Name:		Price	Cash	per Share		Cash/MktCap
United Health	UNH	25.23	8850.00	7.43	30010	0.295
Humana	HUM	29.25	6350.00	37.43	4960	1.280
Wellpoint	WLP	49.18	4980.00	10.27	23840	0.209
Aetna	AET	24.36	2440.00	5.459	10850	0.225
Cigna	CI	24.49	1490.00	5.459	6690	0.223
Amerigroup	AGP	26.77	827.98	15.65	1420	0.583
Molina	MOH	21.89	607.38	23.36	568	1.069
Coventry	CVH	17.73	410.00	9.52	762	0.538
Chevron	CVX	65.91	930	4.64	13212	0.070
Exxon Mobil	XOM	70.07	2514	5.15	34168	0.074
Conoco Phillips	COP	43.36	80	0.54	6424	0.012
Occidental Pete	OXY	69.62	113	1.39	5642	0.020

In addition to having a lot of cash, and largely very sound financials, most of the Managed Care stocks now trade at very attractive fundamental valuation metrics. Take a look at the sector using metrics like the PEG Ratio, Price to Book Value, and Price to Sales. Cheap, Cheap, Cheap, and with growth rates straddling the 10% figure, we see a portrait of bargain basement prices combined with what could be very consistent growth rates for this ‘new normal’ – ‘reduced growth’ economy. For many businesses, top line sales growing at a 6 to 8 clip would be very welcome, and in fact it is possible that later this year, as the stock market realizes that top line sales growth may be coming down, we could see another nasty adjustment in equity market pricing. For now, we are looking at this sector as an area of interest, because (a) the sector has been massively beaten down (b) Obamacare has had the negative psychological effect of under pricing the businesses, and (c) more likely than not, all worst case outcomes are already discounted into the share price. That means that even if a modified version of Obamacare does end up passing, for all intents and purposes, most of these stocks have probably already ‘discounted in’ the bad news, and could thus end up ‘surprising’ on the upside.

		Share	Forward	Price to	PEG	Price to	5Year
Name:		Price	P/E	Sales	Ratio	Book Value	Est Growth
Wellpoint	WLP	49.18	7.98	0.40	0.91	1.13	9.67
United Health	UNH	25.23	7.96	0.36	0.87	1.37	9.25
Aetna	AET	24.36	6.24	0.36	0.67	1.36	11.25
Cigna	CI	24.49	5.92	0.35	0.66	1.78	10.14
Amerigroup	AGP	26.77	9.01	0.31	0.74	1.61	13.50
Coventry	CVH	17.73	8.60	0.22	0.67	0.85	12.70
Molina	MOH	21.89	8.69	0.18	0.95	1.12	11.20
Humana	HUM	29.25	5.37	0.17	0.38	1.06	12.43

We note that UNH reported very strong results in today’s session, and possibly a sign of things to come. In my view, with the sector near new lows on a relative strength basis, it is clear that the extremely negative mindset, and fear of reduced profitability stemming from potential healthcare reforms, has left this group both ‘down and out’. On a contrary opinion basis, that perks up an investor's antenna as a potential trading idea for the second half of 2009.

0721.03

Above: The Managed Care Sector (top clip) and lower: the R/S Ratio of Managed Care to a Broad Cross Section of other Healthcare Stocks.

That’s all for now,

contact information

Frank Barbera
The Gold Stock Technician
PO Box 48072
Los Angeles, CA 90048
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