Get Your Tactics Ready to Profit from This Supreme Healthcare Event

Keith Fitz-Gerald May 08, 2015
25 

Love it or hate it, the Affordable Care Act, aka Obamacare, is one of the biggest single wealth creation opportunities of the next 50 years. But you can’t just pile in like many investors have. That’s a recipe for disaster.

The biggest profits will belong – like they always do – to those who make a “smart entry.”

Fortunately, this isn’t difficult. The entire sector is tailor-made for one of our favorite Total Wealth Tactics – the lowball order.

We’ve talked about this before as a means of maximizing profits when I brought it to your attention ahead of what I (correctly) anticipated would be an oil selloff resulting from the Saudi government’s ill-advised decision to fire the first shot in the oil-pricing war last fall.

At the time I recommended you pick up shares of Halliburton Co. (NYSE: HAL) at a discount. Then, two months later, I suggested you use it again to buy shares of Williams Co. Inc. (NYSE:WMB). WMB has already returned more than 16% since I brought it to your attention, while the S&P 500 has seen gains of just 3.06% over the same time frame.

Now I’m seeing the same set up in healthcare. Only this time, it’s our own government that’s going to shake things up and create the profit-maximizing discounts we know lead to huge profit potential.

It could throw 1/6 of the world’s largest economy into chaos.

As an investor, you’ll absolutely want to be ready for what happens next.

Five Supreme Court Justices Could Destroy the Affordable Care Act This June

Two years ago, the Supreme Court surprised most observers by upholding the constitutionality of the Affordable Care Act, better known as Obamacare. The individual mandate – the requirement that most Americans buy some form of health insurance or pay a fine – survived the highest level of judicial scrutiny. Proponents of Obamacare breathed a sigh of relief.

They were right to – Obamacare couldn’t have survived without the individual mandate remaining intact. If millions of poor and sick people are to be granted affordable health care, they need millions of young, healthy people to join the national insurance pool and effectively lower premiums.

But there’s a weak point – several actually.

Here’s what you need to know. Millions of people who would be required to buy health insurance couldn’t afford to do so. They still can’t. So Obamacare’s drafters included subsidies in the law, allowing millions of poorer Americans to gain insurance and avoid the hefty fines Obamacare would have otherwise dealt them.

Now, if millions of Americans who feel they can do without insurance – the healthiest Americans, in other words – choose to forgo it, health care premiums will skyrocket because health care providers will have to charge correspondingly larger fees to maintain their profit margins.

Capitalism being what it is, those same higher prices will, in turn, drive out larger numbers of healthy people, until only the sickest, oldest Americans are left. When you hear the words, “death spiral” and “health insurance” in the same sentence, this is what they’re talking about.

It’s the nightmare scenario, and it’s only held off so far because the incentives and penalties have forced millions of healthy people to join the exchanges and help pull down costs.

But as is all too often the case in Washington, there’s a crucial section in the 800-page law that was poorly written. Seems the bill’s authors granted subsidies only to health care exchanges established “by the state.”

The Supreme Court is now weighing a case, King v. Burwell, to determine whether the federal subsidies apply in states that haven’t set up their own exchanges. With more than 20 states – including some mega states like Texas and Florida – boycotting exchanges entirely, the stakes are huge, and they will be decided by late June, less than two months from now.

If the court rules that they don’t apply and the subsidies are withdrawn, millions will forgo insurance. This will, in turn, dramatically push up premiums for everybody else currently in the Obamacare system and launch the dreaded “death spiral” that’s been a danger of the law from Day 1. Not surprisingly, the Accordable Care Act would unravel in a real hurry.

Before I go any further, let me clarify one thing: It’s not my role to pass judgement on whether Obamacare’s unravelling would be a good thing or a bad thing. In my capacity as Chief Investment Strategist for Money Morning, I don’t have that luxury.

My job is to help you find opportunities others don’t yet see and hunt down profits using tactics that give you an edge over millions of other investors who will be caught by surprise.

And as always, there will be a chance to profit from the ensuing chaos.

Now Hospitals and Health Care Giants Are Addicted to Stimulus, Too

In 2011, before Obamacare was in effect, hospitals provided $41 billion in uncompensated care from their emergency rooms. But with millions more enjoying state-subsidized insurance, that burden has been shifted from hospitals to taxpayers. That’s a massive windfall hospitals have happily gotten used to.

Health insurance companies have also reaped a bonanza, with the law now forcing millions of young, healthy Americans who might otherwise have taken a pass on health insurance to sign up for their services. Their customer base is now broader and lower-risk than ever.

No wonder that giant health insurance companies – many of whom deployed armies of lobbyists to Capitol Hill to assist in writing the health care bill – are reporting record profits from 2014, with their stock prices having risen 100%, 200%, or even 300% since the bill was signed into law in March 2010.

Having seen their market capitalizations inflate at a rate that puts the Fed-induced bull market to shame, these health care companies are dependent on the continued security that Obamacare offers them – and they know it.

King v. Burwell is so important to the string of historic quarterly earnings these companies are reporting that the mere words of the justices deciding the case right now have the power to move markets.

Last March, for example, Justice Anthony Kennedy gave an array of health care stocks a boost when he opined there was “a serious constitutional problem” with the plaintiffs’ case in their effort to strike down the subsidies. Even the largest health care companies like Aetna Inc. (NYSE:AET) and UnitedHealth Group Inc. (NYSE:UNH) saw stock bumps resulting from traders’ optimism that the law – and flow of profit-giving subsidies – would stand. A single justice’s comment moved tens of billions of dollars in market capitalization in the health care industry in one day.

If that’s what an off-the-cuff remark by one judge at the preliminary hearings can do, imagine what a plaintiff’s victory in King v. Burwell would mean. We’re talking about the judicial rebuke of the century upending trillions of dollars in investments.

It will be an extremely bitter, and this time unsubsidized, pill for the mammoth health care industry to swallow. And the resulting slump would create a legendary buying opportunity for investors looking to get in on an “Unstoppable Trend” – Medicine – on the cheap.

There are more than a few ways to play this. Here are the simplest and purest moves for your consideration.

Supreme Court Lowball Opportunity No. 1: iShares U.S. Health Care Provider (NYSEArca:IHF)

iShares U.S. Health Care Provider (NYSEArca:IHF) is an exchange-traded fund that is heavily weighted with insurance companies, including some of the biggest beneficiaries of Obamacare. It’s seen gains of more than 145% in the five years since Obamacare was signed into law, as the health insurance companies it’s tracked have thrived.

If the Supreme Court strikes down the subsidies that are so vital to Obamacare’s survival, a myriad of companies IHF tracks will see haircuts in the market capitalization, and the ETF will suffer. In fact, it’s even more likely to suffer than most individual health care companies, since its exposure is more widespread.

I believe that IHF could suffer a 20% hit if the Supreme Court surprises with its decision this June. If I’m right, that gives you a great opportunity to pick up shares at a steep discount, knowing that whatever obstacles the Supreme Court may put up in the short term, there’s no derailing the Medicine Trend for long. Congress will see to that, if only in their own self-interest.

Action to Take: Enter a lowball order to buy iShares U.S. Health Care Provider (NYSEArca:IHF) for $102.30 or less. Enter a 25% trailing stop to protect principal and profits.

Supreme Court Lowball Opportunity No. 2: UnitedHealth Group Inc. (NYSE:UNH)

Every major health insurer has something riding on the Supreme Court’s decision alter this year… but you’d be hard-pressed to find one with more skin in the game than UnitedHealth Group Inc. (NYSE:UNH).

In fact, the $10.7 billion company is so dependent on the survival of Obamacare that it even sent in a team of experts to help with website design when the national health exchanges debuted to a disastrous website launch in late 2013! Its leadership was terrified that the law which featured so rosily into their business models might not survive.

Not surprisingly, UNH has recorded historic profits under Obamacare. The already-massive company has just reported that it achieved $10.3 billion in profits in 2014 over revenue of $130.5 billion. That’s a 7% year-over-year increase from 2013, and it was impressive enough to send the company’s stock to all-time highs. Further, UNH reported $32.6 billion in revenue from Q1/2015 alone. That’s an 11.5% improvement over Q1/2014, and it meant additional profits of $494 million for the company last quarter alone.

The improvement can be traced back to the 1.6 million enrollments that UNH announced it snagged year-over-year in its Q1/2015 earnings report. That’s a major expansion of its customer base, for which it can thank the authors of Obamacare, and the individual mandate in particular.

UNH has seen an amazing 246% gain in its stock price since March 2010. If Obamacare is dealt a death blow by the Supreme Court, it will be due for a steep correction. Of course, with the $10.4 billion the company reports on its balance sheet according to Yahoo!Finance, the insurance titan will have the resources to adjust and eventually thrive again.

Action to Take: Enter a lowball order to buy shares of UnitedHealth Group Inc. (NYSE:UNH) at $85.20 or less. Enter a 25% trailing stop to protect principal and profits.

Supreme Court Lowball Opportunity No. 3: Anthem Inc. (NYSE:ANTM)

Anthem Inc. (NYSE:ANTM) is the nation’s second-largest health insurer, and the $43.3 billion company scored 1.8 million new enrollees across every front of its business in 2014. Some 815,000 of them came from the expanded Medicaid program under Obamacare.

Not unexpectedly, Anthem continues to follow the money – CEO Joe Swedish announced a plan to double down on advertising and outreach in states that have expanded Medicaid. “We are targeting future growth in 2015 and beyond,” Swedish said in a recent conference call to investors.

If Obamacare unravels, Anthem’s expanded Medicaid program will collapse alongside it – and that would mean a harsh correction for the company’s stock. But like UNH, it has the resources to withstand the shock, having reported $21.5 billion cash-on-hand in its last quarterly report, according to Yahoo!Finance.

Currently trading at around $155/share, it has a lot to lose in the short term from any judicial surprise.

Action to Take: Enter a lowball order to buy shares of Anthem Inc. (NYSE:ANTM) at $116.25 or less. Enter a 25% trailing stop to protect principal and profits.

In closing, I want to remind you that profitable investments are not about politics or philosophy. But they are absolutely about the historic wealth transfer that is inevitably created with the two collide.

Let’s make sure you’re among the winners.

Until next time,
Keith Fitz-Gerald

25 Responses to Get Your Tactics Ready to Profit from This Supreme Healthcare Event

  1. dbtheonly says:

    Wise words.

    Particularly in the flood of “chicken little” reports urging “prepare to sell everything”, China’s “plan to destroy the dollar”, and the Third World War starting “within six months”.

    Did okay with ESKO. Sold enough to get my original investment (& a bit more) out and so have some left that can go to $20 or .01 without costing me anything. Good call. Thanks.

    • Keith says:

      Thanks for the kind words, DB. As you so rightly point out, there’s always something around the corner. And, of course, glad to hear that you did well with Ekso. Sounds like you executed the “free” trade we talk about as a Total Wealth Tactic…which is superb.

      Best regards and thanks, as always, for being part of the Total Wealth Family, Keith 🙂

  2. Roger says:

    Keith: Is there an options strategy that we could use in anticipation of a negative response from the Supreme Court? And is there a play if the uphold the current law?

    Thanks for all your hard work!
    Roger

    • Keith says:

      You’re welcome, Roger. Let me give that some thought and I’ll put a few alternatives in an upcoming column.

      Best regards for a great weekend and thanks, as always, for being part of the Total Wealth Family, Keith 🙂

  3. H. Craig Bradley says:

    FACTS AND PATIENCE

    I must say that your recommendation for Hal ( low ball below $45) actually resulted in a 10% gain for me at a cost of $42.00/SHARE, well within your initial recommendation last year. To get a 16% gain thus far, you have to either have bought closer to the absolute low ( 52-week ) of upper 30’s. So, honestly, most investors did not necessarily (yet) enjoy the maximum capital gain on HAL. However, it will eventually return to the upper sixties or so and at that time, those who followed your initial recommendation will enjoy a big gain and pick-up some modest dividends along the way. As you say, oil demand never really changed but keeps growing at 1% year globally.

    • William Dahl says:

      Hi Craig,

      The opportunity for 16% gains that the article cites is actually a reference to the returns that Williams Co. Inc. (NYSE:WMB) has seen since Keith called it to Total Wealth readers’ attention on January 7. I have gone back and edited the reference so it’s much clearer to future readers.

      Thanks as always for keeping us on our toes, and for being a member of the Total Wealth community!

      Best,

      William Dahl, Associate Editor

  4. H. Craig Bradley says:

    INEFFICIENT MARKETS

    An accountant told me he expects the subsidy part of Obama Care (AHA) to be ruled as unconstitutional, setting-off the chaos you predict for health care providers. Health care is in play. Money is made in periods of volatility due to market inefficiencies, which is your unstated theme. Many institutional managers are too clumsy to utilize your tactics due to large positions. All they can do is pile-on.

    The Supreme Court often rules closely with 5-4 decisions on a case. Its often very close, and unpredictable. Let me suggest that it will be a narrow ruling which opens the door for Congress and the President to remedy the Act’s legal deficiencies. This would be consistent with Supreme Court John Robert’s apparent tendency to pass-the-buck.

    If you listened closely to his statements two years ago, it can be understood he felt the American People have a role to play by the choices they make. He was absolutely clear he was not going to overrule the American Voters choice for President Obama. Then came the Election of 2012. I believe Justice Roberts has not changed his tune since then.

    • Keith says:

      Interesting insight, Craig. We will certainly see.

      Thanks, as always, for being part of the Total Wealth Family and best regards, Keith 🙂

  5. Dave says:

    Although I’m not sure how many shares of the suggested companies I will be able to buy, I think your explanation of the ACA is one of the best and up-to-date overviews I have read. You put it in a nutshell that a person can actually understand. Thanks.

    • Keith says:

      Thanks for the kind words, Dave. I try very hard to break today’s complicated world down to digestible and actionable bites so it’s always nice to know that I’ve hit the mark!

      Best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  6. Donald Chastain says:

    I asked that my subscription to this newsletter not be renewed. However, after reviewing my request, I would like to change and renew my subscription immediately.

    • William Dahl says:

      Hello Donald,

      To renew your subscription and make sure you don’t miss any more Total Wealth insights, all you have to do is enter your email at this link:

      Thanks for climbing on board! We are thrilled to have you with us.

      Best,
      William Dahl, Associate Editor

    • Keith says:

      Thanks for being part of the Total Wealth Family, Donald. And, best regards, Keith 🙂

  7. Chris says:

    Ok, new to this but think I know what Kieth is saying? Enter the low ball order like a market order, only make it a “limit” order for 120 days?

  8. martin cohen says:

    Microcap Healthcare Tech company. Check out Quadrant Four (QFOR), a computer technology services company providing data base management to companies in the healthcare market. They will be managing several million people on their web site this year that generates monthly fee income per person. They also serve other vertical markets in education and publishing.

  9. C. Smith says:

    Keith: You have not spoken about Liberator Medical HLDGS, INC. (LBMH) for some time…….it shows no signs of being a positive investment……….would appreciate an update regarding your thoughts and if we should hang on or say goodbye to it?

  10. Gerry says:

    with the potential of such a large price impact riding on this case, is there merit in considering buying a put option and a call option around current strike price?

  11. Ernie B. says:

    What exactly do you mean by a lowball order?

    • FYI says:

      With the on-line trading service I use, there is the capability to enter a “trigger”. In this case the trigger would be entered to execute a buy order when the price is equal to or less than the trigger price Keith suggests. I also use the trigger feature for my protective stop after I have executed a buy order.

  12. russ says:

    Keith;
    I’m having difficulty finding a brokerage house that can sell EKSO, any information would be appreciated.
    Also thank you for all the effort you put into your articles!
    Russ

  13. Joanne says:

    Based on personal experience with the ACA, I know that all it did was raise insurance premiums and deductibles while at the same time covering less. My juvenile diabetic (Type 1 viral and incurable) male family member doesn’t need to be paying for free contraceptives or any of the other 40 some freebies mandated by the law that he will never need or use. Politics aside it was a boom to the insurance industry. Policy premiums, deductibles and coverage were increased to reflect the ACA. Ask anyone who doesn’t work for a major corporation how they feel about the ACA. It has been a boom to medical device companies like Becton Dickerson too despite the medical device tax added by the ACA because you need what your disease dictates no matter what. Politically I don’t see how the poor will be able to pay for the increased deductibles even with the subsidies which only reduce premiums. But, yes this article makes perfect sense and I will be watching out for the change, if any, by the Supremes and using it to help pay for those increase costs.

  14. Lois Nielsen says:

    My concern is that the Supreme Court will make a political/economic decision, as opposed to a decision based on a strict interpretation of the law, to avoid chaos in the market and government and paint it what ever color camouflages their decision.

  15. Bob says:

    Keith, if one already owns IHF or one of the others, are you implying that one should sell these now and then place in the limit order?

  16. Barb says:

    I bought ekso thru schwab

Leave a Reply

Your email address will not be published. Required fields are marked *