James Dennin, Kapitall: Former opponents are profiting from Obamacare, so we looked for undervalued healthcare stocks.
One of the biggest opponents of the Affordable Care Act (ACA), or Obamacare, was the health insurance firm Wellpoint (WLP). After all, when Wellpoint tried to raise its premiums by 40% the the political pressure for healthcare reform started to reach a breaking point.
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However, now Wellpoint seems to be one of the biggest beneficiaries of the law. The company, which has a market capitalization of more than $25 billion, has been one of the largest recipients of government spending on Medicare expansion.While profits declined slightly in the most recent quarter, the company's new revenue from the government gives it breathing room to make bets on how healthcare reform is playing out. Now Medicare beneficiaries account for some of the company's biggest source of customers. A year ago it purchased the Medicare manager Amerigroup. In the last few years alone, the percentage of revenue the company has earned from selling insurance to the government has grown from just 10% of company revenues to more than 40% today. Investing Ideas The health insurance industry is still facing headwinds. The system is changing significantly as new reforms from the ACA are implemented over time, which makes investing in the sector much trickier. However, the unpredictability may have sufficiently scared away investors so that many of the companies in the industries have very low valuations. Almost half of the companies which sell health insurance in the United States have price to equity ratios (P/E) below 15, some of which are even lower. We decided to build a list of undervalued insurance companies, relative to the price-to-equity ratio. At the moment, it seems like many of the largest insurers are doing pretty well at adapting to the new healthcare laws. And yet the stock prices are still relatively cheap. Whether you think this represents a buying opportunity, or a dying industry depends on whether you think more reforms are forthcoming.