ObamaCare Benefits Stocks?

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Supreme Court approves ObamaCare and stocks rise.  What impact will the uncertain Presidential election have on the market?

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After the United States Supreme Court ruled that Barack Obama’s health care plan was essentially constitutional, many investors speculate what this could mean for the health services industry as well as the impending November election.

With the Supreme Court’s ruling, Congress has the power to make Americans carry insurance or face a penalty in the form on a tax. Additionally, SCOTUS approved a plan to expand the requirements to qualify for Medicaid, although they restricted the federal government’s ability to punish states that don’t adhere to the new policy.

In the few weeks since the approval, many investors have taken this ruling as encouragement to invest significant money into medical stocks.  The reasoning is that more people will be forced into buying health insurance, resulting in higher spending on medication, medical testing, and regular doctor’s visits.

July 2012 represents the first time since January to boast positive investment for health care stocks.  Furthermore, July brought a net inflow of $710 million in specialized health care and biotechnology funds, nearly equalling the total from 2011. Health stocks are up 11% for the year to date, matching the Standard & Poor’s 500-stock index’s performance over the same period.

Since Obama’s election, health benefit provider, WellPoint Inc (NYSE:WLP) has experienced significant growth.

Over the same period, major health care firms such as Molina Healthcare Inc. (NYSE:MOH), Aetna Inc. (NYSE:AET), and Cigna Corporation (NYSE:CI) have benefitted from similar improvements.

Chief portfolio strategist for Wells Fargo Funds Management, Brian Jacobson, predicts an extended increase in health care spending as baby boomers age because, “more money is going to be flowing into [the sector] regardless”.

Charles Schwab is also supporting investment in health care stocks.  Kully Sumara, a UK client manager, points to the consistent cash flows and dividends as strengths that health care stocks have over other industries suffering from the current global economic circumstances.  Charles Schwab analyst Brad Sorensen adds, “balance sheets in the health-care sector remain flush with cash, boosting the possibility of higher dividend payments, share-enhancing stock buybacks, and mergers and acquisitions.”

All these signs point to sustained growth in the health care industries, so long as the current government stays in power.  Expectations among investors for revenue growth in the health care industry have improved by more than 5% over the last quarter, which ranks second highest among all S&P 500 sectors.  Of the 10 S&P 500 sectors, health care is one of only four to experience increases in expected annual P/E ratios this quarter.

However, some investors see this recent growth as temporary and expect problems with the new plan’s implantation to hinder stock’s improvements.  While all states are supposed to adopt these policies by 2014, the majority are behind schedule or refusing to adopt the changes.  According to recent reports, nine states are unlikely to extend coverage to more patients; eighteen have no plans to make changes, while only thirteen are making “active progress” on adopting the new policies.  Massachusetts, which started this process earlier than any other state through RomneyCare, is leading the nation is adopting Obama’s plan meeting 56% of the new requirements.

It is unclear if these states will continue to fight the changes or what consequences this would bring, but it could result in hospitals and pharmaceutical companies missing out on the expected increase in new customers.

Some speculation regarding the health care sector stems from the lack of confidence and poor market performance following Obama’s signing the Affordable Care Act into law two years ago.  Additionally, it is expected that Human and Health Services will need $750 million next year, on top of the $500 million from last year, to implement the new policies.  Congress has taken a strong stance against these additional funds, which could create significant problems from the execution of the new plans.

Further speculation lies in the upcoming presidential election.  While this ruling represents a trademark success for Obama, Romney has already discussed reversing these decisions if elected to office this November.  Considering Romney’s role in reforming Massachusetts’ health care policies during his time serving as state governor, his adamant opposition to Obama’s new policies is somewhat confusing.  However, his reputation as an efficient businessman and budget-fixer support his claims against health care reforms.  The election brings great uncertainty for the future of the new health care plan and, thus, the health care sector and its firms.

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