A Portfolio for the New World of Health Care

As I’m sure you’ve already heard – the landmark Health Care reform legislation was recently signed into law by President Obama. Regardless of your viewpoints on this reform (and I’m sure everyone has their own opinions), this is arguably the most impactful piece of legislation of our time, and with it comes major changes to the companies involved in healthcare. As I’ve said before, with change comes opportunities, and in true InvestindDecoded fashion, I wanted to discuss what investing opportunities this legislation brings about.

The Low-Down

A few months ago, I wrote about the reform when it was still in its negotiation stages. At the time, I gave my viewpoint on how you could invest in the reform. Now that we have an idea of what the final legislation will look like, I will revisit those predictions and see if they still hold up. Before we can do that, however, let’s take a look at some of the key points of the legislation:

· The primary goal of the legislation is to provide affordable health coverage to some 32 million additional Americans.

· State-based insurance exchanges will be created to enable the uninsured, small businesses, and self-employed to create ‘groups’ through which they can purchase insurance at a lower cost than if they tried to purchase it individually.

· Most larger businesses (those with 50 or more employees) will be fined $2,000 employee/year for not providing coverage for all employees.

· Uninsured individuals who do not purchase coverage will be fined $695/year.

· There will be cuts made to Medicare reimbursement but additional coverage made for Medicaid.

· Insurance companies will no longer be able to deny coverage based on pre-existing conditions or drop coverage for members who get sick.

Winners and Losers

Overall I think that this final legislation is not all that different from the proposed legislation I discussed a few months earlier. There seems to be some distinct winners and losers and, although many of the winners have already seen their stock prices rise significantly, I still think there’s long-term upsides.

Winners

· Pharmacy Benefit Managers – In my mind, these guys are the real winners here…big winners. My prediction is that there will be serious emphasis put on cost-containment for health coverage. Now that coverage is more of a commodity and less of a luxury, margins will be squeezed for insurers. Therefore, they will be looking to save every dollar they can. PBM’s are the ideal way to save money on prescription medication for these insurance companies. I think names like Express Scripts and Medco will see some serious upside. However, one that I think will be the clear winner in all this is CVS Caremark, who I think will win on both the PBM and Retail pharmacy side.

· Pharmaceutical Companies – Drug companies came away like bandits in this legislation (I’d say this is thanks to some nifty deal-making with the government early on in the legislative process). These companies will see an influx of 32 million new customers that would previously not buy their products. On the other hand, they have come back with token concessions as payment for the new demand. Right now, there doesn’t seem to be a single big winner. A pharma ETF would be a perfect investment here.

Losers

· Health insurance Companies – The health insurance industry has just been turned on its head. These sweeping reforms will impact the likes of WellPoint, Aetna, CIGNA, United Healthcare, etc. drastically. The first challenge I see for them is increased cost due to the types of members they will now have to insure (i.e. those who are extremely sick and would otherwise not be able to get coverage). Furthermore, they will face increased competitive pressures due to the exchanges that were set up as well as opening up the market to more competition that was done through previous legislation. Yes there are now 32 million new potential customers. But I think the pricing pressure and increased cost structure will their once-lofty margins and, consequently, shrink profits.

My Reform Portfolio

With all this said, I have a simple portfolio that I’d recommend for reform. Now keep in mind many of these stocks have already had a significant run-up and may experience some near-term weakness (next time listen to my recommendations that first time I make them). But I think long-term there’s still opportunity here. This portfolio will give you a fairly diversified healthcare setup while taking advantage of the true winners (as I predict they will be):

1. 25% - CVS Caremark

2. 25% - PBM ETF (to diversify in case things don’t go well for CVS)

3. 30% - Pharmaceutical ETF

4. 20% - Biotech ETF (to get more leading edge pharmaceutical exposure)

What are your thoughts?

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

You Can Now Bet on Movies!

In the spirit of the 82nd Oscars (which I may or may not be watching as I write this post), today I want to discuss a novel new investment vehicle that I recently heard about.

We've discussed Options investing here on InvestingDecoded in the past. The basic idea is that you create a contract whose worth is based on the intrinsic value of a hard asset (i.e. it's value is derived from the value of a hard asset...i.e. a derivative). Recently Cantor Fitzgerald, leading financial services company, announced that it has received approval from the CTFC to create an market exchange for Options based on movies.

Huh?

Known as the Cantor Exchange, this new market will allow investors to bet on the box office success of movies. Investors will be able to invest in options for upcoming film releases. Each options will price at one-millionth of the expected gross ticket sales of the movie 4 weeks after release. That means that if the market is betting a movie is going to make $100 million dollars after 4 weeks in the box office, the option contracts will price at $100. As the expected 4 week gross revenue number changes, the contract price will adjust accordingly.

What's the Impact Here?

The ability to trade the success of movies provides more than just a betting market where you and I can prove how much we know about good movies (although it does that too). The Cantor Exchange will provide a marketplace for moviemakers to hedge their risks when financing movies. There has been a strong and consistent trend in Hollywood to bring out pricier and more extravagent films. Having an exchange where you can gauge the success of a project you've funded gives moviemakers the opportunity to long or short options for their movies. That way they can reduce their exposure if the movie is not a commercial success. This also gives opportunities for low budget filmakers access to more capital as they'll be able to write Option contract for they're films and have access to a greater number of investors through the Cantor Exchange.

But All's Not Well

I think the concept of the Cantor Exchange is really interesting. It's bringing investing principles to filmaking to a level at which it has never been. However, I do see some serious risks with this exchange. One of the most important principles in investing is the equal dissemination of information to all potential investors. In other words, if one investor knows something, all of them should - otherwise you get the chance of insider trading. The risk I see with the Cantor Exchange is that film producers can gauge the potential success of a movie prior to its release and start trading options on it while other investors haven't had the opportunity to see the movie. However, I think that is a very fixable situation. There are very strict regulations on how CEO's of publicly traded companies (as well as others with 'material insider information') can trade the stocks of those companies. These same rules would need to be applied to studios and those at the studios with that type of information. With these rules in place, I think the Cantor Exchange can be a really interesting and lucrative endeavor for all of us individual investors.

Learn more about the Cantor Exchange here

What are your thoughts?

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.