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TheStreet Open House

4 Buy-Rated Health Care Stocks Primed for SCOTUS

NEW YORK ( TheStreet) -- If you're looking to take long positions in health care stocks based on the Supreme Court's Obamacare ruling, you might as well select quality names.

The Supreme Court is expected to hand down its decision on a challenge to the Patient Protection and Affordable Care Act on Thursday morning. The Act was signed by President Obama in March 2010, and includes an expansion of Medicaid and a mandate requiring individuals not covered by employer-provided or government-sponsored health insurance plans to maintain "minimum essential coverage" or face an IRS penalty, beginning in 2014.

For starters, the penalty for not meeting the individual health insurance coverage mandate requirement has no teeth. The penalty in 2014 will be $95, followed by a $350 in 2017, reaching $750 in 2015, subject to certain adjustments.

Gavin Magor, a senior analyst with Weiss Ratings, says "assuming that the individual mandate is declared unconstitutional and everything else is upheld, which is probably the most likely scenario, the insurance companies and the policy holders will actually be the losers, because of the cost issue."

According to Magor, insurers' efforts to prepare for 2014 were "geared around the assumption that there would be a guaranteed growth of policy holders. They can't just hire in January 2014." If the individual mandate is thrown out, "the insurers will then have to look at how surviving mandated reforms can be paid for, in the long run, with a smaller policyholder base, so they will be looking at increased rates and they might have to look at more consolidation, and that's very likely."

"This is a business where the margins are small, and you need to have the benefits of size to actually make money," according to Magor, who adds that "if the individual mandate is thrown out, health insurance stocks could drop sharply, but when investors realize that the larger players will eventually be the only ones left standing, we could see a sharp rebound in stock prices for the larger players."

If you are already holding quality health care stocks, you probably already believe in the names, and may have a chance to build positions at lower prices before or after the ruling. If you are considering taking a long position, you might have a similar opportunity.

If the Supreme Court decides to uphold the entire Patient Protection and Affordable Care Act, Thursday could provide an excellent selling opportunity.


Citigroup analyst Carl MacDonald said back in March that "commercial managed care names have a lot more upside than downside on the Supreme Court individual mandate decision," and that "in all but one scenario, the stocks are going higher, and there's potential for significant upside if the entire reform legislation is struck." The analyst went on to say that "the perceived negative outcome occurs if the court strikes the mandate but upholds the rest of the bill, but fundamentally, this isn't so bad, since the penalty for not buying insurance is too weak to really matter. "

MacDonald said last Thursday that following the Supreme Court's decision, the market will turn "its focus to the November elections, since a Republican victory could have an even more profound impact on the future of health reform than the court."

While playing stocks based on news headlines is generally a recipe for pain, if you are going to take this approach, you might as well consider high quality names.

TheStreet Ratings takes a very conservative approach to rating all stocks publicly traded on the New York Stock Exchange, AMEX and NASDAQ, that have at least five quarters of financial data available. The ratings emphasize long-term total returns, as well as revenue trends, capital strength and dividends, while also considering short-term performance, financial stability and volatility. A rating of B-minus (Good) or higher is considered a "Buy" recommendation.

Here are the four U.S.-based health insurance or benefits management companies with the largest market capitalizations with "Buy" ratings from TheStreet Ratings:

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