Here’s The Real Story Behind Trumpcare’s Defeat
Whenever you observe legislative wrangling in the nation’s capital, look beneath the posturing of the political kabuki theater and focus instead on investor behavior. To learn the real story, follow the money.
Consider the American Health Care Act (AHCA), or “Trumpcare,” which exploded last Friday in spectacular fashion. It was the policy-making equivalent of the Hindenburg disaster.
After pulling the widely loathed AHCA, a chastened House Speaker Paul Ryan declared: “Obamacare is the law of the land.”
This drama occurred shortly before the market closed. In a matter of minutes, hospital stocks soared and closed the day with whopping gains. That’s the big takeaway from Trumpcare’s demise, which the mainstream press missed.
Below, I show you one of the best ways to profit from this relentless health industry dynamic.
Opportunity from the flames…
During the 2016 campaign, real estate mogul Donald Trump portrayed himself as a seasoned negotiator, an unrivaled practitioner of the “art of the deal.” Now that Trumpcare has flamed out, Wall Street is starting to worry whether Trump can deliver the goods on tax reform, deregulation and infrastructure spending. This anxiety will generate greater market volatility in the days ahead.
In the meantime, opportunistic investors can profit from Trumpcare’s defeat, by investing in health care stocks that are integral to Obamacare’s managed care controls. These equities soared on Friday afternoon and their momentum is likely to continue.
On Friday, after it became apparent that Trumpcare was dead, the following for-profit hospital operators and managed care companies closed with massive one-day gains: Molina Healthcare (NYSE: MOH), Community Health Systems (NYSE: CYH), Tenet Healthcare (NYSE: THC), LifePoint Health (NSDQ: LPNT), HCA Holdings (NYSE: HCA), and Universal Health Services (NYSE: UHS).
So far this week, hospital stocks as a whole are continuing their upward trajectory. Problem is, giants such as HCA Holdings are obvious plays on health care growth and their shares are getting pricey. Their upside potential also is limited by their sheer size.
That’s why I prefer mid-cap Molina Healthcare, which operates health plans for millions of Americans eligible for Medicaid, Medicare, and other government-sponsored programs.
With a market valuation of $2.5 billion, California-based Molina is divided into three segments: Health Plans, Molina Medicaid Solutions, and Other. The Health Plans division operates health plans in 12 states, serving 4.2 million members who are eligible for Medicaid, Medicare, and other government-sponsored programs.
The Molina Medicaid Solutions segment provides administrative and information technology services to Medicaid agencies in Idaho, Louisiana, Maine, New Jersey, and West Virginia, as well as drug cost-containment and rebate services in Florida. The Other segment offers behavioral health and social services.
Molina’s low-cost administrative services were already enjoying robust growth before Trumpcare died, as Obamacare greatly expanded Medicaid coverage. This prosperity should accelerate now that Obama’s signature domestic achievement won’t get repealed.
Molina’s “win-win” equation…
Here’s the kicker: Even if Trump somehow succeeds in pushing his goal of health care privatization and reduces Medicare and Medicaid expenditures, companies such as Molina would need to step in and fill the administrative vacuum. This company wins on both sides of the equation.
Molina has grown through methodical expansion without taking on debt or getting overextended. The company also has sidestepped the adverse publicity and litigation generated by unethical rivals in the Medicaid market, which is susceptible to fraud.
As a mid-cap, Molina is large enough to finance organic growth and withstand the inevitable ups and downs of the cyclical health sector. But it’s small enough to confer the sort of outsized gains that are elusive among the bigger players. It’s also apparent that many large-cap health stocks are going through a maturation stage, during which revenue and earnings growth slow down.
The president was mocked by Democrats and even members of his own party for saying “nobody knew health care could be so complicated.” He will discover that changing the tax code is complicated, too. Perhaps more so.
But regardless of what happens to the rest of Trump’s agenda, at least one thing is sure: Obamacare repeal is unlikely to occur anytime soon, a political reality that should drive long-term earnings growth for Molina.
The average analyst expectation is that Molina will rack up year-over-year earnings growth of 13.7% in the current quarter, 35.8% in the next quarter, an eye-popping 312% in the current year, 57.30% next year, and 18.93% over the next five years on an annualized basis.
Got any questions about health care investing in the Trump era? Send me a letter: firstname.lastname@example.org — John Persinos
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