By JEN WIECZNER
Forget whether Obamacare will change the cost of a doctor visit; many investors have a bigger question when it comes to the fate of the Patient Protection and Affordable Care Act: How will the Supreme Court's sure-to-be-landmark ruling on the health care reform law affect their portfolios? Even the way a Supreme Court justice speaks sways health care stocks. During hearings this spring about the constitutionality of the law, Justice Antonin Scalia compared forcing people to buy health insurance with forcing them to buy broccoli, and within two hours the stock of large hospital firm HCA Holdings fell 4 percent.
But some savvy pros are doing something seemingly outrageous -- ignoring Obamacare entirely. These experts say that no matter how the nine Supreme Court justices rule at the end of June, health care reform is here. Between ballooning hospital costs and the wave of aging baby boomers expected to tax the fiscal health of Medicare, the situation that spawned the call for reform in the first place isn't going away, even if this particular law does. Some pros are putting their money on companies throughout the health care sector that can provide better care at a lower cost. "The status quo is just not sustainable," says Les Funtleyder, who manages the newly formed Miller Tabak Health Care Transformation fund.
The Global Diagnosis
Some investment pros say the best health care investing opportunities are actually beyond the U.S. borders. In places such as China, Latin America and Eastern Europe, the need for basic medical supplies and drugs outstrips the demand for pricey cutting-edge equipment. So some Big Pharma firms, which have struggled to regain sales lost to expiring patents at home, can benefit from a whole new group of patients abroad. Two that pros are buying now:
Johnson & Johnson (JNJ)
The maker of Band-Aids and other basic medical necessities is well-positioned to sell more stuff, thanks to the growth of the world's middle class, analysts say.
This French firm gets a third of its sales from emerging markets and has enough cash flow to buoy it if it hits snags in the U.S., says Derek Taner, manager of the $1 billion Invesco Global Health Care fund.
While health care stocks have historically been a haven in recessionary times, analysts say, they struggled during the debate over reform. Obamacare's passage actually helped: The sector is up 16 percent since the bill was signed into law in March 2010, but that's still lagging the broader stock market, which rose 16 percent over the same time. This year, health stocks have been held back by the election-year tug-of-war and the possibility of cuts in Medicare and Medicaid. "The thing investors hate the most is the uncertainty," says Alex Morozov, Morningstar's director of global health care research.
Nevertheless, some analysts are eyeing companies that provide options to help lighten the load on the system, from outpatient services to medical devices and tests that reduce infection rates and hospital stays. Insurers might have the most to gain or lose in the Supreme Court decision, but fund managers are betting on a few managed-care companies, such as UnitedHealth Group (UNH),
Jen Wieczner discusses the health care sector and what companies are up to with The Wall Street Journal This Morning's Gordon Deal.
Kris Jenner, manager of the T. Rowe Price Health Sciences fund (who sat in on the Supreme Court hearings), has invested in SXC Health Solutions (SXCI),
Some experts say the best way to slash health care costs is to treat people faster or more effectively. Companies that can determine which drug will work on a particular patient or screen for diseases without surgery will benefit from the trend toward preventive medicine, says Dave Blaszczak, a senior health policy analyst at Potomac Research Group. Exact Sciences (EXAS),
Perhaps one of the biggest threats to the American health care system -- the millions of baby boomers hitting retirement age -- could also be investors' greatest opportunity. Many of those new retirees will need hip, knee and joint replacements, along with advanced disease care, which could mean a windfall for firms that provide those services. Fund managers are looking at firms making innovative cancer and heart disease treatments, as well as dialysis firms such as DaVita (DVA),
To be sure, experienced investors say that, for now, it's impossible to remove the Supreme Court uncertainty from the equation. Analysts and fund managers are basing investments largely on their own hypotheses of what the justices are thinking. Funtleyder says he hopes to make money on the market confusion surrounding the ruling: "We're just assuming that investors will overreact one way or the other."