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Healthcare: The Mother of All Trades?


Many will disagree with this trade but likely cannot disagree that this sector is the most misunderstood and confusing whose future is most uncertain, given our politics and entitlement programs.

I wrote after the elections that despite all the focus on energy and defense, I think the most sweeping overhauling agreement (that I will completely disagree with) will eventually be found in healthcare reform. I think the US is going to change dramatically, and consistently move closer to socialized care (meet me in the black market with cash for a better answer).

However, and this can get confusing, I think the misperception will be that all healthcare companies are doomed. Yes, many will be under severe pressure (notice the huge layoffs of Pfizer's (PFE) sales force just this week) from price controls which is the more accurate way to describe "negotiated prices" that Congress is now in favor of.

I'll deal with that group another time. It is possible that the most misunderstood group in the sector is managed care, the private insurers. Look at any in the group: United Healthcare (UNH) , Wellpoint (WLP), Coventry (CVH), Humana (HUM), Aetna (AET). Less than inspiring charts and more than uncertain futures according to many. But what is not clearly understood is that as states redirect the future of healthcare in this country - is where the insurers sit at the table, or if they still have a seat at all.

Massachusetts is leading the charge – look for the "Connector" (sounded like a horror film when explained to me) coming soon in '07, a law already passed, and the government will soon be in charge of helping Red Sox fans get insured. No word yet on a policy from Lloyds on bad off-season acquisitions though. Watch other states fall in line shifting to mandatory and single payer systems. Even Texas is close I'm told. You think we like gun racks on our pickups down here? Just wait until we get our first state income tax to pay. I can hear my neighbors now…"I gotcher Connector right here."

Here's the mistake investors will likely make, in my view. As bad as I think this will be for the US, these plans do not exclude the private insurers; just the opposite. They need them more than ever. And now, many states will be forcing new customers their way.

I have hated this group for quite some time and it's terribly hard to get excited about them right now (especially since most investors hate being customers of the same businesses). And I'm terribly biased against them, because when my partner and I opened our own firm I wanted nothing to do with traditional health insurance and we chose an HSA (another round of opportunities but that's for another time). But my distaste is precisely what caught my attention. Some of my firm's research started pushing these names to us when I never would have looked.

My firm has been bidding under the market on one name in this group and are already lining up some chips for other groups in the healthcare sector that we'll share as we get filled. Yesterday we were filled on Humana, likely the only one from this group we'll trade.

When I asked one of the nation's leading brokers how she would pick among the group, having nothing to do with their stocks, and not telling her which one I liked, she said, "I have ten renewals on my desk right now, all for Humana." She went on to say the company seems to improve their technology more than the rest and they are not increasing rates for customers as much as the rest. I smiled for the first time, hopefully not the last, on this hated trade and ignored group – usually a good recipe for my firm.

Many will disagree with this trade (probably why I noticed a TD buy signal as well – the selling has been consistent) but likely cannot disagree that this sector is the most misunderstood and confusing whose future is most uncertain, given our politics and entitlement programs. How do I know there is misplaced focus in the stock market as well?

Well, how many people reading this right now can tell me within 10 cents the price of a gallon of gasoline at this moment? (I'll wager almost 100%). How many can tell me how much it is to deliver their baby? (Likely close to 0%). I think the opportunities in this sector are lining up in a very similar way as energy did for my firm when oil was $15 a barrel and my firm triple-weighted the sector. We're not rushing to do the same just yet – we'll let bad politics set us up even better first.

A USA Today poll found that healthcare cost was the number one concern among all Americans. Shouldn't it be health care instead? If you look around the world at so many businesses which other people now do better than the US, shouldn't the US do whatever it can to focus on perhaps the only one left where it is still the envy of the world? I fear it won't, I fear the US is going to mess this up terribly. I talk to doctors who didn't want their kids to go to medical school. One of them I call Dad.

I was talking to my friends in D.C. last week who tell me how this mess will take center stage (it already would have sans Iraq) next year. If they're right, my firm will have even better entry points, in what might be shaping up as the mother of all trades for us.
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Position in HUM, healthcare
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