The U.S. Supreme Court opened a review of President Obama's healthcare law on Tuesday. The three days of arguments may result in the president's legislative achievement being found unconstitutional.
Healthcare accounts for 18% of the U.S. economy. Debate on the constitutionality of the mandate that uninsured people purchase coverage comes on the second day. Tuesday the justices heard arguments on the penalty for failing to get insurance.
At the core of the debate, does the penalty amount to a tax? A 145-year-old law, the Anti-Injunction Act, says courts can't rule on the legality of federal taxes until they are imposed. The penalty doesn't start until 2015; justices may decide it is too early to rule on the health law's constitutionality.
According to Adam Winker, a constitutional law professor at the University of California at Los Angeles (UCLA) School of Law, it's "the sleeper issue of the health-care case." "The great constitutional controversy over Obamacare could end with a whimper rather than a bang."
The court will have to decide, does the mandate fall under the scope of the Congress' constitutional authority to regulate interstate commerce.
On the third day of arguments, the justices will hear debate about what should happen to the rest of the law if the insurance requirement is voided. The court will also take up whether the law, by expanding the Medicaid program, unconstitutionally coerces the states into spending more on healthcare for the poor.
STOCKS TO TRADE
Making a new high for the rally off of the August 2011 low is the Health Care Select Sector SPDR (NYSEARCA:XLV). The sector is leading the broader market. The dividend yield is 1.97%. XLV is trading above a rising 50-day simple moving average. Healthcare was among the market leaders in Tuesday's trading.
UnitedHealth (NYSE:UNH) is the best hedge against all outcomes and will likely rally the most post-closure. UnitedHealth is trading above the rising 50-day moving average. EPS over the next year is expected to increase 12.84% and the dividend yield is 1.21%.
Humana Inc. (NYSE:HUM) is the most defensive name with the least exposure to this investment controversy given its concentrated exposure to Medicare. Humana is finding support at $85. The dividend yield is 1.16% and forward P/E is 9.58.
WellPoint (WLP), Coventry Health Care (CVH) and Aetna (NYSE:AET) should see a lift of the overhang in a bull case scenario if the mandate is determined to be unconstitutional, while other onerous provisions that pose margin headwinds are also severed with the mandate. WellPoint and Coventry have been laggards; Aetna is a leader.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.