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Gaming Obamacare: How to Win at News-Driven Investing

28 June 2012 in Hardeep's Thoughts

The US Supreme Court has just upheld the  Affordable Care Act, the federal health care legislation known not-so-affectionately by its detractors as “Obamacare.”

A key part of the Court’s decision involved a validation of the law’s so-called individual mandate, which calls for every citizen to buy approved health-care insurance by 2014.

Regardless of your political leanings, as an investor you need a sophisticated approach when considering investment opportunities that will follow in the wake of the Court’s ruling. And those opportunities – both good and bad – are sure to come after a major legal ruling that affects 18% of our gross domestic product.

I believe that, leading into the ruling, every investor should have applied a straightforward three-step process when considering the potential to make money from the Obamacare decision  – or, for that matter, when focusing on any imminent change to a sector or industry. 

1. Determine the potential impact for the companies involved. Figuring this out, of course, is no small matter because the Court had three primary options when it decided this case: uphold the entire law, scrap the entire law, or something in between – validating parts of the legislation, while tossing out some of it (some pundits have predicted this will be the fate of the individual mandate).

In the wake of the full-on approval we essentially got,  many investors may now find their decision somewhat easier. If millions of Americans are now added to private-insurance and Medicaid rolls, for example, you may think that the stocks of health-insurance companies or Big Pharma stand to benefit.

If the Court had tossed the whole law out, you may have believed, as a recent Barron’s article suggested, that managed care companies would get a pop after freeing themselves from the burden of taking on patients that would likely drive up costs.

If, however, some of the law’s provisions werere struck down, how would  certain sectors deal with lower reimbursements and no guarantee of higher patient rolls?

2. Figure out your investing timeframe. Once you’re comfortable that you’ve determined a news event’s impact potential, it’s time to consider how long that impact will last. While there has been  an initial move by many health-care sectors on the day of the Court’s Obamacare ruling, nobody knows what the long-term impact will be.

Investors should determine now whether they’re interested in capturing some news-driven momentum or whether their investment choices are based on future secular changes in the health-care industry that may take some time to play out.

3. Make your move. Once you’ve sorted out which asset classes are attractive and which are not, it’s time to match your convictions to your investing goals. And there is certainly no shortage of alternatives for investors. You may, for example, look at going long or short individual health-care stocks, which have a potential for outsized gains or losses, or you may find it more compelling to investigate health-care exchange-traded funds, which could diversify some risk or lift all boats if your directional bet is correct.

This process is both the task and exhilaration of empowering your own investment ideas. Making yourself follow a rigorous analysis process and understanding the boundaries of your risk tolerances can only help you stay disciplined and true to your investment strategy  when investing in volatile news-driven events.

At Motif Investing, we make available portfolios of up to 30 stocks that reflect real-world trends and investment ideas, which can provide exposure to real-world ideas, themes, and events, which you might consider when developing your investment strategy.

One of our motifs, titled “Repeal Obamacare,” was built with the idea that certain health-care segments stood a chance of performing well if the Court struck down the legislation. For example, medical device companies, including Medtronic (MDT), Becton Dickinson (BDX), C.R. Bard (BCR), and Edwards Lifesciences (EW), face a 2.3% excise tax on revenue under the current Obamacare law. 

We weighted the portfolio heavily (85%) toward such companies, because the impact of the law was so closely tied to affecting the revenue of that health-care segment. Following the Court’s ruling, it may surprise nobody that all of those companies’ stocks are down on Thursday.

Other segments in the motif, also weighted by the law’s expected impact, include diagnostics (companies like Quest Diagnostics (DGX) and assisted living (which includes companies like Emeritus Corp. (ESC).

With the Repeal Obamacare motif performing pretty much as expected – poorly – in the wake of the law being upheld, investors will certainly want to consider other alternatives (stocks, bonds, ETF, or mutual funds) that may have a chance of performing well in the context of current economic conditions.

Our Discount Nation motif, for example, which includes companies like Wal-Mart (WMT), Amazon (WMT), TJX (TJX) and Dollar General (DG), is a play on expectations of a boom in low-cost shopping. In the past three months the Discount Nation motif is up 7.6%, compared with a drop of nearly 6% in the S&P 500.

Hardeep Walia is co-founder and CEO of Motif Investing.