You Can Buy Into This Sector Long Before Obamacare Takes Effect

With the presidential elections now a distant memory (despite political signs still littering the roadside by my house) and President Obama assured of a second term, the debate is once again under way in the health care sector over what the implications will be for health care stocks once the Patient Protection and Affordable Care Act, collectively known as Obamacare, takes effect in 2014.

We at The Motley Fool have covered just about every angle of the PPACA and its implications for your portfolio over the past six months. Today, I'm taking it a step further and going out on a limb by proclaiming that you don't need to wait for the skepticism to build in the health plan provider sector -- you can buy those companies right now!

A wall of worry
Health plan solution companies have mostly been slammed based on certain implications of the recently passed bill. Specifically, insurers will be required to spend at least 80% of collected premium on patient care, and premium boosts will need to be made within reason (e.g., no sudden 20% premium hikes). In addition, insurers will no longer be able to turn away patients with pre-existing conditions. Trust me, I understand where the skepticism comes into play here. However, it's my stance that this sector has more than paid its fair share of penance in anticipation of the enacting of the PPACA.

I agree with the Wall Street consensus that Medicaid-based insurers -- like Molina Healthcare (MOH 0.37%) and Centene (CNC 0.34%) -- are set to benefit from expanded Medicaid coverage, which is set to bring roughly 16 million newly insurable patients into the mix. These insurers often have lower margins to work with because of the nature of their clientele and are thus more susceptible to rising medical costs. Bringing in boatloads of new patients is a great solution to their constant low-margin woes.

Climbing the wall
But the benefits of the PPACA won't end with just the Medicaid-based insurers. Individual, commercial, and small-business plan providers like WellPoint (ELV 0.13%), CIGNA (CI), Aetna (AET), and UnitedHealth Group (UNH -1.03%) should be beneficiaries as well.

One of the primary reasons I feel this way has to do with the fact that these health-benefit providers aren't sitting on their laurels in anticipation of the PPACA going into law in 2014 -- they're taking action now. For WellPoint, that meant purchasing AMERIGROUP (AGP) for $4.5 billion in order to get a hold of some of those 16 million newly covered Medicaid-qualified patients. Aetna made a similar ploy, purchasing Coventry Health Care (CVH) for $7.3 billion in August to get its hands on Coventry's vast Medicaid-based patient pool. CIGNA, you could say, beat them all to the punch by grabbing HealthSpring for $3.8 billion in 2011, to gain exposure to government-plan-based patients. UnitedHealth, on the other hand, hasn't taken the approach of the acquirer and has been implementing many of the internal changes proposed by the PPACA since 2010.

Another factor to consider is just how much power will lie with health-care regulators. One of the primary selling points of the PPACA is that premium hikes will be tempered with a marketplace-like setup taking place that will allow consumers to make informed decisions. But, we have to remember that price-setting ultimately lies with the HMOs themselves. Aetna, for instance, has boosted premiums by as much as 21% in recent months, proving this point.

The bare-bones valuation of these health-plan providers is another selling point. Most analysts on Wall Street are expecting the PPACA to be a negative for the reasons I listed above, and investors have assigned extremely low forward earnings multiples in anticipation of their struggles. I have to wonder, though, when does this pessimism become overdone?

Source: Morningstar, Yahoo! Finance.

The answer to my previous question is now... now is when this pessimism is officially overdone! With the exception of UnitedHealth, which is still inexpensive in many respects, the remaining three health-benefits providers are all markedly below their five-year averages in terms of book value, price-to-cash-flow, and forward earnings.

Foolish roundup
This sector is at what I consider to be bargain basement pricing prior to the implementation of the PPACA in 2014, and I feel that many of these health-benefit solution providers will surprise investors next year and in the years thereafter.