Obamacare Can't Kill These Stocks

Check out these recent quotes by politicians regarding what health-care reform should look like:

  • "... health care costs are out of control, and we have to bring them under control."
  • "... the coverage they need at a price they can afford, finally bringing costs under control."
  • "… lower cost, improve quality, expand coverage, and retain choice."
  • "As a doctor, I know we must lower costs and improve care..."

Not very imaginative, are they?

As you might guess, the quotes come from both sides of the aisle. It doesn't matter what the final health-care reform bill looks like; politicians seem uniformly interested in reducing costs for their constituents.

Sounds like a pretty good investment thesis to me.

Making money by saving others money
That's basically what pharmacy benefit managers such as Medco Health Solutions (NYSE: MHS  ) and Express Scripts (Nasdaq: ESRX  ) do. They save money for their customers -- insurance companies and other companies that self-insure -- by saving money for their customers' employees and members through lower-cost drugs. It's really a win-win-win as far as I can see.

The savings come in two forms. Pharmacy benefit managers offer mail-order drugs for ongoing treatments. By eliminating the retail space that pharmacies like Walgreen (NYSE: WAG  ) require, the pharmacy benefit managers can reduce costs and pass it along to their members. Back in 2006, when CVS Caremark (NYSE: CVS  ) was just CVS, it clearly saw where drug dispensing was going, and thus snapped up pharmacy benefit manager Caremark.

The other half of the savings equation comes from the use of generic drugs instead of brand-name drugs. By encouraging the end user to be conscious of the difference in cost between generic and brand-name drugs, pharmacy benefit managers are able to save their customers money, some of which they pocket themselves. The companies have been steadily increasing their generic fill rates over the last few years, with more than two-thirds of their prescriptions now filled with generic drugs.

As multibillion-dollar blockbusters such as Pfizer's (NYSE: PFE  ) Lipitor and Bristol-Myers Squibb (NYSE: BMY  ) and sanofi-aventis' (NYSE: SNY  ) Plavix go off-patent in the coming years, there's lots of potential for further growth of that generic dispensing rate.

There's just one problem
I'm not the only one to realize the potential for the pharmacy benefit management industry.

Weighing in with market caps greater than $20 billion, Medco and Express Scripts are big enough to have already been discovered. Much of their potential growth has already been priced into their stock.

Company/Index

Rise Since Presidential Election

Medco Health Solutions

55%

Express Scripts

44%

S&P 500

17%

Source: Google Finance.

You might be OK investing in Medco or Express Scripts, but with expectations so high, there's not as much room for error.

A better solution
Think smaller. Small-cap companies have a few distinct advantages that can lead to outsized returns:

  • Starting from a smaller base, it doesn't take nearly as much to register insane growth. It's commonplace to see biotechs with triple-digit returns, in part because they're starting from essentially no revenue.
  • Smaller companies are considerably more agile than their larger brethren. While it seems likely that health-care reform will lead to lower costs, exactly what form those reductions will take remains to be seen. Companies that can adjust quickly will have a distinct advantage.
  • Finally, smaller companies tend to be ignored by analysts simply because of their smaller size. That gives small investors like you and I chance to find them before they reach full value.

Of course, that means you're going to have to hunt a little, but I believe you can find some outstanding companies in this industry. Because of the potential for uncovering gems hiding in this sea of uncertainty, our Motley Fool Hidden Gems team has decided to increase its exposure to the health-care industry.

In its real-money portfolio, it recently added one company that helps drugmakers save money by outsourcing their sales and marketing needs, and another that manages a database of health-care information. Both should do well whether the price of drugs goes down or not.

You can see the names of these companies, including a video valuation of one of them, with a free 30-day trial to Hidden Gems. There's no obligation. Simply click here for your risk-free trial.

Already subscribe to Hidden Gems? Log in here.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. MedcoHealth Solutions is a Motley Fool Stock Advisor pick. Pfizer is a Motley Fool Inside Value selection. The Fool's disclosure policy may be small, but it's neither obscure nor ignored.


Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2009, at 8:38 PM, thisislabor wrote:

    thanx for the article.

  • Report this Comment On September 21, 2009, at 11:52 PM, dlezama wrote:

    It is very frustraiting when you dress your ads for premium services so they look like articles.

  • Report this Comment On September 22, 2009, at 5:42 AM, deadlysaber wrote:

    The CDC Center for Disease Control is telling us there are now more than 11 confirmed cases in Kansas, Los Angeles, CA Imperial County, San Diego, San Antonio, Bryon Texas, Queens New York City and the virus has made it to New Zealand, and Britain. How is this possible in only a few days? Simple, we live in a very mobile world.

    The World Health Organization and CDC are working together to see how they can stop the spread of this outbreak. The H1N1 Swine Flu virus is not a normal virus, but a combination of various types of influenza including strains that effect humans, pigs, and birds. It can spread from person to person from sneezing or coughing. Also touching objects that infected people may have toughed and then touching your eyes, nose or mouth.

    The CDC offers these tips: www.cdc.gov/swineflu/key_facts.htm

    Now then, considering this entire pandemic breakout, perhaps it is time to invest in the company that makes Tamiflu, which would be Roche, a stock which is doing well thanks to its recent purchase of Genentech. Tamiflu has been mentioned as one of the drugs that should take care of the Swine Flu. The stock price seems to be moving on this news and thus, could be a very good stock play until this pandemic runs its course.

    Not that anyone wants to make money on the deaths of flu victims or those rushing to buy drugs to help them from dying, but as long as this is happening, it might be a good time to buy some Roche Industries stock. Please consider this.

    --------------------------------------

    Money without intelligence is like a car without a road.

    http://www.intelligentinvestingtips.com

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