Many Ways To Win In the HMOs
The worst case scenario appears to be priced into HMO stocks. HMO’s such as Aetna and Wellpoint are trading at roughly seven times next years projected earnings, while HMOs have historically traded at multiples over thirteen times earnings. The main reason for these low valuations is the uncertainty surrounding Obamacare. I believe the decline in HMO stocks has gone way too far as there are so many ways for investors to win in these stocks.
Obamacare seems to be a foregone conclusion for market participants even though Mitt Romney has vowed to get rid of Obamacare if he wins. While Wall Street has written off Mitt Romney he is actually leading in some polls and is raising more campaign money than Barrack Obama. If Mitt Romney wins these stocks will likely soar towards historical multiples, well over 50% higher. I am not predicting he will win but I believe he has a much better chance than the market is giving him.
Even if Obamacare comes to fruition it does not necessarily need to be a disaster. Wellpoint has been labeled as the most susceptible to the new laws, although that may have changed as a result of their takeover of Amerigroup. Only 25% of Wellpoint’s profits come from individuals and small groups, the business lines with high risk from Obamacare. 75% of Wellpoint’s earnings streams are likely to see little effect from Obamacare.
Obamacare uses the HMOs in order to administer health care. This will mean tens of millions of new customers. There will be little reason to compete on price as there will be plenty of new customers to go around. It is baffling that everybody assumes this will destroy the HMOs. Its entirely plausible that the HMOs will find a way to make money off of these new customers. Its also entirely possible that the Obamacare rules are tweaked if they are too onerous to the HMOs.
I am not arguing that there isn’t uncertainty surrounding the HMOs. My argument is that prices are extremely attractive with tremendous upside if the disaster scenario being priced in does not materialize.