In a year that is set to feature a battle for the White House, it is somewhat hard to believe that an equally important battle is already underway. As the U.S. Supreme Court remains on the brink of ruling on the Landmark ObamaCare case, weakness in the U.S. jobs report last week has reawakened the Federal Reserve's fervor for printing money. By using the healthcare sector as a lens through which to observe this battle, one should be able to not only see the issues more clearly, but capitalize on this understanding toward the end of making profitable trading decisions.
A ruling on President Obama's Affordable Healthcare Act is expected to be handed down by the High Court sometime this month. This is a critical landmark decision because it will not only define how healthcare is purchased in the U.S. moving forward, but it may define the very nature of the role of government. For most, the core issue is whether or not the government is empowered to require its citizens to purchase something.
Without careful consideration, one may conclude that the government is already in the business of requiring to citizens to buy things - we all pay taxes and pay the fee to have a driver's license and license plates. In those cases, however, those costs are predicated on some action by the individual or on some privilege being conferred. In other words, those costs may be avoided. If one does not want to pay income taxes, he or she can simply choose to not work or invest. If one does not want to pay for a driver's license, one may choose to simply not drive. While these are not realistic solutions for the vast majority of Americans, there is an option. Under ObamaCare, for the first time in history, there would be a cost associated with simply being alive - it would be unlawful to simultaneously be breathing and not paying for some form of medical insurance.
The above is somewhat of an oversimplification, as any critic of this position would point out, but it is at the heart of the issue. In these terms, the law is unconstitutional on its face and should be repealed, just as was the conclusion of the Appellate Court. The real question that remains outstanding is will politics or common sense carry the day. The most likely result is that part of the law will be struck down and other pieces may be allowed to persist.
The impact of this decision will obviously have a major impact on healthcare. If one uses the Health Care Sector Select SPDR (XLV) as a proxy, there has been minimal response thus far. While the SPDR S&P Pharmaceuticals (XPH) and its components will not be directly affected under the ruling, a major shakeup in healthcare is certain to have an impact. Overall, the law is seen as a negative for the sector.
Time To Play Defense
Given the weakness in the stock market and the economy, shifting some of one's capital into defensive stocks, like Pfizer (PFE), is advisable. While the Federal Reserve has managed to contain themselves for the recent months, they have been clear that weakness in the jobs market may require renewed bond buying, as in more quantitative easing (QE3). The weak news from the economy suggests that considering some defensive sectors, like healthcare, may prove necessary.
Adding to the attractiveness of the healthcare sector is that, ObamaCare aside, in an election year, healthcare tends to be a good place to find safety if not performance. As the candidates attempt to position themselves for the good of "the people," healthcare becomes a central issue. This usually means campaign promises that are designed to make healthcare more affordable, but also mandates designed to push critical research forward with government funding. While only a percentage of these promises will ever be realized, the market tends to welcome them and reward healthcare stocks in the process.
Within the healthcare sector, few companies have enjoyed the long-term stability that can be boasted by Pfizer. The combination of solid management, a well-developed pipeline and a solid industry position make this a safe play with plenty of upside potential. On a valuation basis, the stock has a trailing twelve month price-to-earnings (P/E) ratio of 17.5 relative to 16.7 for Merck (MRK), 14.5 for Novartis AG (NVS) and 11.5 for Sanofi (SNY). While the stock is the most expensive of the group, under this thesis, value is only a small part of the discussion - the real attraction is the stability and long-term prospect of the stock.
One metric on which Pfizer excels and which speaks to its stability is its operating efficiency as measured by operating margin. The company has an operating margin of 29.4% relative to 22.3% for Merck, 20.9% for Novartis and 21.8% for Sanofi. While all of these are well-run companies, the slight edge for Pfizer is important. Additionally of note, each of these stocks offers a solid dividend yield, between 4 and 5%.
When one considers the struggle between the push of the pending Supreme Court ruling and the pull of both an election year and a tenuous economy, adding a respectable, defensive name like Pfizer to one's portfolio is prudent. Furthermore, given the quality of the company and the income element, this is not a bad stock to have as a core holding under any circumstances.