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posted on 02 October 2017

Third Rail Politics: How To Play Trumpcare's Latest Collapse

by John Persinos,

Investing Daily Article of the Week

As a student at Boston University more than 30 years ago, I spent an inordinate amount of time commuting to class on Beantown’s transit system, affectionately known as “The T." Back then, the trains were rickety, unreliable and sometimes dangerous.

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I remember the subway tunnel signs that read: “Danger! Don’t Touch Third Rail." The Boston Globe would intermittently run stories of unfortunate souls (often intoxicated students) who had been killed in grisly fashion because of contact with the electrified third rail.

These college memories have resurfaced in recent days, as I watch Republicans in Congress touch the new “third rail" of American politics - Obamacare repeal. With every attempt at dismantling President Obama’s signature domestic achievement, GOP lawmakers have ignored warnings and gotten zapped over and over again.

Regardless of your political persuasion, the reality is unavoidable: odds overwhelmingly indicate defeat this week of the latest Obamacare repeal effort, the widely unpopular Graham-Cassidy bill.

On Monday at the Senate Finance Committee hearing on the bill, dozens of disabled protestors in wheelchairs were forcibly dragged screaming from the room, all on national television.

Also on Monday the major stock indices closed lower, in part because Wall Street sees the chaos in Congress and increasingly doubts tax reform will happen. As of this writing, Graham-Cassidy was short of the votes needed to pass the Senate and was all but doomed.

Healthy income choices…

To be clear, I’m not arguing the pros and cons of Obamacare. That’s not my job. My number one concern is making you money. So, what does this week’s Trumpcare debacle mean for investors?

I expect health stocks to rally, now that uncertainty over federal health policy has been laid to rest for the time being.

Smart investment bets are companies that administer Medicare and Medicaid programs and sell health plans to exchanges under the Affordable Care Act (aka, Obamacare).

Other well-timed bets are real estate investment trusts (REITs) that specialize in health care facilities, especially those integrated within the Medicare and Medicaid programs. Also appealing now are companies that specialize in cost containment and make up the payment infrastructure of Obamacare.

For income investors, the good news is that many of these plays generate high dividends, especially health care REITs. The time is ripe to put your money in health care REITs, an often-overlooked class of investment.

The best way to make money over the long haul, even under today’s dicey conditions, is to buy the stocks of growing companies whose products and services are crucial to everyday life. It’s even better if these companies are tapped into unstoppable trends. Few companies better fit this description than health care providers.

When packaged in the form of high-yielding REITs, the investment appeal of the health care sector is even greater. Several health care REITS offer yields ranging from 4% to 9%, which is a strong return given the overall low risk.

Certain trends will continue, no matter who is sitting behind the desk in the Oval Office. One of them is the aging of the U.S. population, as Baby Boomers who went to college during the 1970s (folks like me) approach retirement age. Another is the remarkable pace of technological innovation in medical care.

The health care sector’s growth continues apace, with sustainable momentum. The Health Care Select Sector SPDR ETF (NYSE: XLV), the benchmark exchange-traded fund for the health services industry, has generated a total return year to date of 18.8%, compared to 11.7% for the SPDR S&P 500 ETF (NYSE: SPY).

Total U.S. health spending (both public and private) is projected to rise to one-fifth of the U.S economy by 2025, as the following chart makes clear:

The Medical Moneymaking Machine

National health expenditures (% of GDP)

Source: Centers for Medicare and Medicaid Services

Regardless of the health sector’s phenomenal long-term growth, you still need to pick your spots. Doubt the importance of highly selective stock picking? Consider this statistic: only 4% of publicly traded stocks account for all of the net wealth earned by investors in the stock market since 1926.

Indeed, a sign of a market peak is when fewer and fewer stocks are participating in the upswing, as we’re seeing now. Regardless, select health care stocks should perform well for the rest of 2017 and beyond.

The push for medical cost containment has been fueling consolidation in the health sector. Under the laissez-faire Trump regime, health care giants will have more freedom to join forces and foster economies of scale.

Meanwhile, the health services industry no longer needs to fear that a liberal Hillary Clinton administration will impose pressure on prices. For as long as Trump is in office, health care executives will enjoy enormous freedom to pursue whatever strategies they think best serves the interests of shareholders.

During the campaign, Donald Trump expressed “populist" concern about price gouging by health services companies, but it’s apparent now that his rhetoric won’t translate into tangible action under his deregulation-minded administration.

The imperatives of cost containment…

One of the health sector’s greatest growth potentials lies in the field of Medicaid, the federal-state program that provides health care for the poor. A major reform wrought by Obamacare is that millions of lower-income Americans without health coverage can now qualify for Medicaid.

Whether you agree or disagree with this policy, President Trump and the Republicans have consistently failed at undoing this legacy of President Obama.

The non-partisan Congressional Budget Office reports that because of Obamacare, an estimated 16 million Americans have been newly insured through Medicaid, whose coverage will be fully paid by the federal government. States now pay about half; Obamacare offers financial assistance for states to expand coverage. Companies that administer Medicaid for Uncle Sam are exciting investment opportunities.

Also promising are pharmacy benefit plans (PBMs), which are third-party administrators of prescription drug programs. PBMs also contract with pharmacies to negotiate discounts and rebates with drug manufacturers. Publicly traded PBM companies are experiencing huge growth, as employers and government agencies increasingly use them to play hardball with health care providers.

PBMs fill about two-thirds of prescriptions in the U.S.; the top PBM players provide not only capital appreciation potential but also decent dividends that should please income-hungry investors.

Health care IT is another booming area. The most valuable commodity in the business world today is information, and that’s especially true in the health care field, where success isn’t just measured in dollars and cents but also in human lives. In particular, the use of Electronic Medical Records (EMR) is proliferating and the technology behind it has become more advanced. IT companies that specialize in EMR enjoy long-term tailwinds.

As lawmakers get fried (yet again) by touching the third rail of American policy, you can reap electrifying gains with health care stocks that are positioned in the most promising niches.

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