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Traders Should Grab Some Cheap Hospital Stocks

|About: Community Health Systems, Inc. (CYH), Includes: ODP, SPLS, THC

Summary

The decision by a Republican judge against Obamacare subsidies is likely to be reversed.

Hospitals do have long-term problems. This is not a long-term investment call.

Buy the weakest, which are takeout candidates.

The decision by federal judge Rosemary Collyer that Obamacare insurance subsidies are unconstitutional has sent hospital stocks plummeting.

Traders should grab some cheap hospital stocks.

This decision is not going to be upheld on appeal, and the decision is being stayed pending appeal. The court Collyer, a Bush appointee, reports to has 7 Democrats on it, against 4 Republicans. Collyer has a long record of hostility to the current Administration, and actually suggested impeachment over the issue in open court.

What happens next is thus predictable. The appeals court will hear the case and rule for the Administration. The House, which brought the case, will appeal to the Supreme Court. But the Supremes are deadlocked 4-4 since the death of Antonin Scalia, so the appeals ruling will stand.

This is not to say the hospitals are great long-term investments. Efforts to merge in order to control local markets are bound to be fought by the Administration, which can't even see Office Depot (NYSE:ODP) and Staples (NASDAQ:SPLS) getting together. There are new rules against reimbursements for "never events" - when re-hospitalization is forced by mistakes - and new incentives to keep even recalcitrant patients from being readmitted.

Hospitals are like hotels or airlines, in that they have a fixed capacity, and they don't make money when that capacity isn't being used. But occupancy rates are declining as people with chronic conditions are treated in out-patient facilities, as patients face higher deductibles, and as hospitals themselves face lower reimbursements.

The two companies that took the biggest falls on this news, Community Health (NYSE:CYH) and Tenet Healthcare (NYSE:THC), are also those most likely to snap back quickly. But these chains are also in the most financial trouble. Tenet has not earned a profit since the first quarter of 2015. It carries $14.4 billion in debt on $23.7 billion in assets. Community results show almost no growth, with revenues for the most recent quarter at $4,999 billion against $4.911 billion a year ago, and its balance sheet is just as debt heavy, $16.9 billion in debt carried by $26.7 billion in assets.

But for traders this is just another good reason to hold these stocks. As relatively weak players, these companies are the most likely to be taken out if consolidation resumes on a large scale. Buyers could include other hospital chains as well as insurance companies. Kaiser Permanente and Intermountain Health, which own health care facilities, have a huge advantage in the Obamacare exchanges because they are able to control how much they spend.

The fact is that whatever happens in the courts or in the election, the fee for service model is dying, the fee per patient model is rising, and hospital chains in the long run are being squeezed. But that doesn't mean you can't take advantage of another trader's panic.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.