Healthcare Investing: It's Time to Pay Attention

Includes: RMD, THC, XLV
by: Jeff Miller

In my 2010 preview, I highlighted health stocks as a group to own. I mentioned the Health Care SPDR (NYSEARCA:XLV) as a basic choice, but I have a shopping list of specific names in mind. These include providers, insurance companies, and health information technology.

Apropos of yesterday's Health Care Summit, we can start to visualize the end game.

Not Political Opinion

As usual, I am not writing about the merits of the legislation. I have my viewpoint, and you should, too, but that is not the subject of my work. I am trying to do something quite different, and more valuable for investors: Forecasting the end of the health care debate.

If we knew how this was going to turn out, we might be able to pick the right stocks. That is the challenge.

My 2009 Prediction

In December, I predicted that a health care bill would pass. I also suggested that the Democrats would threaten the use of a little-known procedure called "reconciliation." This process requires only a majority vote, not the 60 votes needed to overcome a Senate filibuster. My prediction was completely accurate -- at least until the Massachusetts Senate election. A bill had passed both Houses, including 60 votes in the Senate, but the bills were not exactly the same. Before a conference committee could resolve the differences, the Massachusetts election reshuffled the deck. The situation became very uncertain, with most expecting that no bill could succeed.

Updating the Health Care Prognosis

Yesterday's Health Care Summit was a rich source for news commentary and analysis, but here is the most important fact: President Obama is playing hardball.

Republicans repeatedly asked him to renounce the reconciliation procedure as a means to pass the legislation and the President would not agree. I see this as a strong bargaining tactic. Obama hopes that Republicans will compromise on key points, and a bill will pass with bipartisan support. If not, he is willing to use whatever tactics are necessary.

Readers can check out my prior article for more detail about this, but there are two basic conclusions:

  1. Some form of the legislation is likely to pass, despite current skepticism.
  2. As this becomes apparent, there will be better buying opportunities for some of the key health care stocks.

When the issue has been resolved, the entire health care sector should trade higher.

Disclosure: I am currently long THC and RMD in personal and client accounts.