Next week, the Supreme Court will issue its opinion on the Affordable Health Care Act (forgive me for forgoing the silly and uneducated "Obamacare"). Those of us who practiced law but don't today -- we "recovering lawyers" -- watch the Court as ex-athletes watch their sports; somehow feeling we're still in the game. We're not. But that doesn't mean we're humble. We Monday morning quarterback with the best and worst! So here's a lawyer and analyst quarterbacking for investors, with two great stocks to name.
One: It's impossible to predict next week's result. Two: The result may well be more muddy than clear. And three, big deal. The uncertainty has given us marvelous investment opportunities -- two in particular -- with margins of safety, just as all decisions face an inherently uncertain future.
Prediction is fun but impossible
We ex-athlete lawyers love to opine from the seats, but it's absolutely impossible to predict any decision of the court from oral arguments. From 76-year-old Justice Scalia's just-plain-nuts belittling of the case volume, to the media debate over the solicitor general's performance on behalf of the administration, it's mostly theater.
The oral arguments rarely mean anything about the decision. The judges and their clerks had long before dissected the written briefs and governing law and the justices knew where they were going long before the formality of oral arguments. Oral arguments are holdovers from the 19th century when the briefs were shorter and law less developed. The judges issued opinions orally, sometimes one after the other, and often on the spot. But they do offer the public a fig leaf.
Five fingers -- and not the new running shoes
I like to think that the University of Chicago Law School exposed me and my peers to the best of both sides that will consider this case. At the time, my professors included now-legendary progressive thinkers such as Cass Sunstein, whose books have influenced not only the course of legal thought but policymakers; he is now the administration's administrator of the Office of Regulatory Affairs. And on the other side, the conservative law and economics school of judges Posner and Easterbrook, the former and current chief judges of the Seven Circuit Court of Appeals.
If I learned anything about what these sides agreed on, it was that Justice Brennan's rule prevails. He held up five fingers as the rule of the Court. It's all about getting five votes out of nine. Politics, law, economics, theory, whatever. Five fingers.
(My favorite Easterbrook story from law school days: A favorite student in our class, we'll call him Mr. Jones, arrives haggard. When called upon Paper Chase style, Jones declares that he's unprepared. Easterbrook, fond of striking fear into the hearts of students, bellows, "And why is that?" Jones replies, "My wife had a baby last night." No beat missed, ol' Frank rejoins, "Well, Mr. Jones, that would be an excuse if you had had the baby!")
And then those five fingers are fuzzy
The Court also muddies the waters left and right when it can't reach a clear consensus. Take, for example, affirmative action. It's OK to take race into account, but you can't have quotas. Oh, wow, that is easy for a school to figure out in the real world. Is it about playing a game, doing one thing and saying another?
Uncertainty equals inefficient pricing and stock deals
Yet the view that the court's decision -- coming next week for sure -- makes a difference, is, to use an investing cliche, overblown. I'll leave the debates over whether the Court will strike down the mandate and leave the rest intact, the so-called severability argument. If you cut off the arm (the individual mandate), does the patient (health reform) live? What if the mandate is actually the head? Does the court have the authority to do so? Who knows?
In terms of stocks, the valuations discount negative effects at a range of health-care companies such as UnitedHealth Group
|
Company |
Market Cap/LTM Levered Free Cash Flow |
EV/TTM EBITDA |
|---|---|---|
| UnitedHealth Group | 7.6 | 6.6 |
| WellPoint | 7.3 | 6.2 |
| WellCare Health Plans | 24.3 (expensive) | 1.9 (crazy cheap) |
| Humana | 4.7 | 4.4 |
| Coventry Health Plan | 4.9 | 5.4 |
Source: S&P Capital IQ.
The lesson is that just as it is impossible to predict the future for a stock, so, too, the Supreme Court. But the uncertainty the court has injected has given us the ability to buy the stocks cheaply, and any uncertainty at all of whatever kind that allows that is good for investors.
And the future, regardless, is always uncertain.
