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Obamacare FAIL: The One Stock to Buy

Full disclosure, fellow investors: I'm as perplexed by the health insurance reform "conversation" as the next sentient citizen. Year in and year out, the cost of health care out-inflates all comers, and yet the beat goes on. And on and on and on ...

So too does the beating we all take in the form of higher insurance premiums. The math only gets uglier the farther out you look. The U.S. will spend roughly $2.5 trillion on health care this year, after all, and over the last 10 years, health-care costs have increased at four times the rate of inflation.

Four times!

Here's a shocker
Dyed-in-the-wool cheapskate that I am, I too have an overheated opinion about what should happen on the health care front, but I'll spare you yet another one of those and cut to the chase: Plain and simple, the stock to buy if Obamacare looks destined to lose is UnitedHealth Group (NYSE: UNH  ) .

For my money, it's the insurance industry's best operator -- though, to be sure, it's struggled of late. The Minnesota-based concern has posted anemic earnings over the last three years, for example, even as its industry average rose at a double-digit clip. More bad news: UnitedHealth's debt profile goes the other way, with the company's debt/capital ratio surpassing the level of leverage sported by close competitors such as Aetna (NYSE: AET  ) and WellPoint (NYSE: WLP  ) .

So what's UnitedHealth got that those companies don't?

Just this: A valuation profile that prices the firm well below even a painstakingly conservative estimate of fair value. The company is cheaper than the broader market (as measured by the S&P 500), and it's trading at a healthy discount relative to peers in terms of price-to-cash flow over the last 12 months, too.

About that cash flow: UnitedHealth delivered roughly $3.5 billion of the stuff in fiscal 2008. And while that represented a sharp reduction relative to frothy fiscal years in 2006 and 2007, the company is on the comeback trail, posting almost $4.3 billion in FCF over last 12 months. Not for nothing, then, have insiders been snapping up shares thus far this year.

Industrial strength?
I suspect those will turn out to be Foolishly wise purchases of a great company in an industry poised to profit once the uncertainty discount currently afflicting health care fades -- and with it, perhaps, any chance of reform. The market absolutely hates mystery, after all, a dynamic that can afflict even "safe haven" sectors like health care.

All of which leads to this question: Why not just bypass the uncertainty for now and go where the growth already is? Apple (Nasdaq: AAPL  ) and Oracle (Nasdaq: ORCL  ) , for example, actually managed to grow revenue and free cash flow during an economically miserable 2008. So too did Pepsi (NYSE: PEP  ) and Google (Nasdaq: GOOG  ) .

What's more, if analysts are even just directionally accurate, there's more growth where that came from: That fantastic four are expected to increase earnings at a double-digit clip over the next five years.

Pay for the privilege
Alas, those fine firms aren't exactly bargain-bin specials: Golden growth has been priced into these companies' shares. All but Pepsi trade at more than 20 times current earnings, and even Pepsi -- a stock I'm a big fan and erstwhile owner of -- trades at 18 times cash flow, following the healthy run-up it's enjoyed over the last six months.

Not so much for UnitedHealth, though: It's a great company in a regulatory risky business that's currently trading for a proverbial song. As the conversation evolves toward what could very well be toothless reform -- complete with an expanded base of customers who are required to purchase health insurance, no less -- I suspect its stock price will shine.

The Foolish bottom line
One stock, of course, doesn't add up to Foolishly diversified sector exposure, but not to worry: While United Health is indeed a three-time recommendation of the Fool's Inside Value, the service has tapped eight other health care concerns -- one of which (and only one) currently appears on Inside Value's list of Best Buys Now. That distinction owes in part to a price more than a third below the team's penny-pinching estimate of intrinsic value.

A sneak-peek at that company -- and every other recommendation the service has made, each of which comes with a recommended "buy below" price -- is completely free for the clicking. Grab your guest pass here: It could be just what the doctor ordered -- particularly if the words "Obamacare FAIL" flow across your Twitter feed as summer fades to fall.

Shannon Zimmerman runs point on the Fool's Duke Street and Ready Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast n' furious podcast. A fresh edition of MFM hits iTunes each Friday, and you can listen by clicking here. (Link opens iTunes.) Shannon doesn't own any of the stocks mentioned. Google is a Motley Fool Rule Breakers recommendation. Apple and UnitedHealth Group are Motley Fool Stock Advisor picks. UnitedHealth Group and WellPoint are Motley Fool Inside Value selections. Pepsico is a Motley Fool Income Investor recommendation. The Fool owns shares of UnitedHealth Group. You can check out the Fool's strict disclosure policy right here.

Read/Post Comments (13) | Recommend This Article (29)

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 09, 2009, at 4:09 PM, plange01 wrote:

    obamas heathcare plan failed a few weeks ago he jusat keeps whipping a dead horse!as for the healthcare stocks they are deader than that horse!!!

  • Report this Comment On September 09, 2009, at 5:10 PM, djm20 wrote:

    This is a tough call. Obama may well get SOMETHING since the Demos control Congress. It may well be a dehydrated, anemic piece of legislation, but one that can be built upon later. It is the same theory that was used when Bush got the RX bill passed. It pleased almost no one, but it was SOMETHING and eventually will be amended and fattened up to be really something.

    However, given the political climate and the massive opposition to the anticipated damage any legislation would do to the healthcare system, my money is on a straight failure.

  • Report this Comment On September 09, 2009, at 6:57 PM, Mikeconroy wrote:

    I think rumors of Obama's health care plan's demise are, to steal from Mark Twain, premature. First premise here seems to be that what we have in a healthcare 'system' can be deemed a success. A system that so poorly distributes a basic need can hardly be called a success. If we were talking about roads or jails or (ahem) education, no one would be calling universal health care 'socialistic'. If you're a military family or dependent, federal employee, or member of Congress you have pretty decent coverage that carries into retirement and cannot be revoked at the whim of the employer or insurer. For a big chunk of the rest of the country, it's health care roulette. I think that's broken, and I'd like to see our statesman try to fix it. I'm not thrilled with what Obama proposes either, but like Bob Dylan once said "failure's no success at all'.

  • Report this Comment On September 09, 2009, at 7:11 PM, NEPA18704 wrote:

    Obama is a very smart man, read his books. He may have stumbled on the way to achieve his goals but he will get up. The real reason health care costs are rising in this country out of control is that we have "for profit" companies indebted to the stockholders and most of the population have insurance that pays the bills with no questions asked thereby eliminating and prohibiting any competition. If insurance companies fail to pay out of price objections the burden fall on the recipient.

    I believe a sure way to start containing costs is for the government to begin purchasing the equipement(x ray machines, MRI, CAT etc) that hospitals use and charge exhorbitant prices for. The hospitals say the high costs to use this equipment is because of the cost of the machinery itself. What better way for govt to get involved than to buy the equipement and tell hospitals what to charge. This helps solve the dilemma by controlling costs and keeping govt out of health care. I am sure other scenarios like this one could be looked at as well if the single plan does not play out.

  • Report this Comment On September 09, 2009, at 7:48 PM, NFLNostradamus wrote:

    By the time the Magic Putty president pulls a Barrackenstein out of his hat tonight, the world will know he is the one and true Obama Lama for sure and he shall pronounce to all (in the words of Robert Zimmerman) "Everything is broken" Or maybe he'll just go with Bill Moyers and say healthcare is a profit center not a public service then cut his deals so the most useful alliances for this and other imminent megabusiness opportunities can continue to convince the populace that it's a not a pile of doo if it's rainbow-colored spray painted and topped with a golden-glittered bow.

  • Report this Comment On September 10, 2009, at 1:01 AM, thomdd1959 wrote:

    “I'm the president of the United States, and I'll carry out my responsibilities the way I think is appropriate.” --Barack Hussein Obama

    All Healthcare Legislation And Regulation By The Federal Government Is Unconstitutional! Government Healthcare Is Not An Option!

    The real issue here is Power and Control!

    “Don't interfere with anything in the Constitution. That must be maintained, for it is the only safeguard of our liberties.” --Abraham Lincoln

    We can not compromise on right and wrong! Truth is Truth! Americans need to “draw lines in the sand”. Why is Obama trying to sell us on his Healthcare Reform? He has had more opposition from “We the People” on this issue and lost more support than any other issue, yet he does not listen to us or let it go. Why? Do not be deceived, Healthcare reform is a smoke-screen. The real issue here is Power and Control!

    “Experience has shown that even under the best forms of government those entrusted with power have, in time, and by slow operations, perverted it into tyranny.” - Thomas Jefferson

    Why does Obama ignore our real issues-Our Economy?

    Where is our missing One Trillion Two Hundred Billion Dollars? Let him answer this question first!

    Anybody who supports health care reform is clearly a Traitor to “We the People” of the United States of America! No Compromise! No health care reform!

    We demand real transparency, with plenty of civilian watchdog czars. Government czars are an insult to the intelligence of the American people! Government czars are an “end run” around our Beloved Constitution. Many of our entrusted government employees are a total disgrace to U.S. They only care about their own best interests!

    “When the people fear their government, there is tyranny; when the government fears the people, there is liberty.” -Thomas Jefferson

    We are all tired of the Whitehouse trying to sell us health care reform. You know, I know and the American people know this is really about more government power and control. Our biggest problem has become our government! Stop! Just stop all this nonsense!

    Obama now has made another 8.5 Billion available to ACORN. The $8.5 Billion was part of the Stimulus Package that nobody in Congress had time to read before signing.

    “The essence of Government is power; and power, lodged as it must be in human hands, will ever be liable to abuse.” - James Madison

    We need laws stating that any Representative, Senator or President that has the audacity to sign any bill without reading it and fully understanding it should go immediately to jail without any bond? We must raise the bar of Integrity and Honor for our employees! Elected or appointed “public servants” need to achieve a much higher standard. How did it get so low? If they are found guilty, a 30 year minimum sentences would not be out of line! This complete lack of responsibility is a very serious issue! It’s totally scandalous, outrages and just plain wrong! It’s Criminal!

    "I believe there are more instances of the abridgment of freedom of the people by gradual and silent encroachments by those in power than by violent and sudden usurpations." --James Madison

    Remember the oath of office all our government employees took:

    To protect the Constitution of the United States of America against ALL enemies Foreign and Domestic!

    “We The People are the rightful masters of both Congress and the courts, not to overthrow the Constitution but to overthrow the men who pervert the Constitution.” –Abraham Lincoln

    We Must Never Again Allow Our Leaders to Have Unaccountable Trust! EVER!!!

    People are corruptible! We must always question and watch very closely everything they do! Our Freedom, Our beloved Constitution, Our National Sovereignty, “We the People” and the fact that we are a Constitutional Republic is why the United States of America is the Greatest Nation in the World! Any bad truths about our Country are the slow results of the corruptible human nature of a few individuals! Power and wealth can corrupt a person if not kept in check! After we fix our current problems, and we will, we must put in play many more “checks and balances”. We must figure out a way to completely take away the opportunity of corruption! Nothing personal - but “We the People” must always come first and be protected!

    “The Constitution is the guide which I never will abandon.” --George Washington

    All Healthcare Legislation And Regulation By The Federal Government Is Unconstitutional! Government Healthcare Is Not An Option!

    “I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.” --Thomas Jefferson

    President Obama, Senate Majority Leader Harry Reid and Speaker of the House Nancy Pelosi, must stand down! The only honor they have left is in their resignations. If not, then the right time to demand Obama’s impeachment is now!

    “We can all commiserate forever about how bad things have been, are, and will continue to be. But I don’t think that we can afford to wait for elections in order to have our say about putting a stop to this madness. Enough, already! Let’s start talking treason, prison, and death penalties for all malefactors in government who subvert, ignore, skirt and otherwise trash the Constitution of these United States of America. Those who have sworn to uphold the Constitution and have then ignored their oaths of office are guilty of perjury and malfeasance in office.” –Stephen A. Langford

  • Report this Comment On September 10, 2009, at 1:01 PM, NEPA18704 wrote:

    From the US constituion:

    ``We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common Defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.''

    What doesn't everyone understand about that paragraph. It is a commitment to PROMOTE the general welfare of all persons as opposed to protecting a few priveledged groups.

  • Report this Comment On September 10, 2009, at 2:04 PM, iGod wrote:

    thomdd1959 is clearly uneducated.

  • Report this Comment On September 10, 2009, at 5:53 PM, guiniepig wrote:

    For all the people here that think the insurance industry as it is should not be reformed, I hope you or someone very close to you developes a chronic medical condition; then you will see haw fast your insurer tries to dump you.

    On May fourth I recieved a cancelation notice for being behind on my payments, on May fifth I recieved a refund check for my remaining weeks of coverage. A call to them from my lawyer straightened it out and I am still covered today, but since May my Dr. has recieved an average of three forms a month he needs to fill out for them, and it seems every time I turn around they want more paperwork from me. The public option will hopefully put a stop to this.

  • Report this Comment On September 12, 2009, at 1:59 AM, Kensdumb wrote:

    I say, "Hooray for commenter "THOMDD1959". He is one of the most educated persons here! I can not pick any bones with him. He's right on!

    Out-of-control Government, such as we have had for many years is fast dismantaling our liberty! Both national parties are responsible, but this last lot is beyond belief. And in only 8 months has spent more on foolishness than the last 5 administrations combined. I shudder to think what our debt will be in three years and 4 months from now. Don't think I can count that far. I haven't time. I'm 78 and know that I won't live long enough to see the real damage this lot has done. Good luck children, grand children, and great grandchildren.

  • Report this Comment On September 14, 2009, at 9:29 AM, usul2525 wrote:

    Obama is loosing creditablity daily. I read a comment above to read his book. The only sucess he had was to get someone to buy that book and to get the American people to elect him. In 1976 Senator Edward Kennedy ran against an unpopular incumbent President Jimmy Carter, I watched a little known Bill Clinton introduce Kennedy at a DNC speech about universal health care, Kennedy LOST. Bill Clinton is elected president 12 years later. There were no significant health care changes in those 12 years. Hillary appointed Health Care Czar. Hillary LOST and has been a back seat politician since, No change to health care. The Liberals have attempted to make CAPITALISM a nasty word. All the liberal politicians and common folk should pay very close attention to thier mutal funds list of investments because the Drug companies and insurance companies, banks, auto indusrty that liberals bad mouth about being greedy is putting money into thier pockets for retirement also. It is about color "GREEN"

  • Report this Comment On September 15, 2009, at 6:32 AM, f30702 wrote:

    Americans are so insanely opiniated on their political beliefs that they will carry on yack-yacking even in their grave. To prove a point they are willing to cut their noses to spite their faces. They don't even know what is good for them.

    A nation of fifty years, America will become a high-cost, health-care deprived banana republic and the Asians would have you for lunch! Unite before it it is too late...even God will not save America!

  • Report this Comment On September 25, 2009, at 5:55 PM, TMFAdmiral wrote:

    Hi Shannon,

    Raw D/C ratios do show UNH as more leverage than AET and WLP. BUT I would prefer to look at the net debt position of each company. If you do this you'll see that UNH has stronger balance sheet & leverage position than Wellpoint. UNH has $4.5 billion in net debt versus $7.5 billion for Wellpoint.

    Best Regards Philip

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