Cashing In on Obamacare

I know, I know. Obamacare is the worst idea since the Spice Girls reunion tour. It will stifle competition and kill capitalism. It will bankrupt the country and have us eating cat food in retirement. We'll all have to submit to the presidential death panel our DNA plus a 1,000-word essay on "What I would like to do next summer…" in order to decide who gets an insulin prescription and who gets a sympathy card. Hey, did I mention the entire country's going commie?

Oh, I’m sorry. My mistake. You're a fan of Obamacare? Then rest assured, I understand your enthusiasm for the subject. Wringing costs out of the healthcare system is vital. Clearly, the only way to do that is a government-run reform program. Government being known for its efficiency and lean operations, a pillar of the reform must be a public insurance option. This is the only way to shake the existing health-care establishment out of its complacency. If that means a few less ivory backscratchers for those Wall Street fat cats (who, by the way, have more money than you do. I'm just sayin'), then so be it. Also, did I mention those fat cats are rich?

Step away from the talk radio.
Sorry if that sounded flip, but frankly, I'm amazed at the vitriol that's been whipped up -- on both sides -- of this debate. And I'm tired of being amazed. I acknowledge that this is an important debate for our country, but I’m not spending any more energy getting worked up about it. The misinformation spouted by health-care reform's detractors ("death panels!") and proponents ("record profits at insurance companies!") is too pervasive to amaze me any longer.

Besides, I think there's a better way for us investor types to spend our limited energy on Obamacare: We should be figuring out how to make a buck in health-care stocks.

The unloved sector
Some of you are no doubt thinking, "Make money in health care? This guy had better hope Obama includes major psychological benefits in his plan." But if so, you might have said the same thing back in May when we purchased shares of Atheros Communications for our real money portfolio at Motley Fool Hidden Gems. At the time, any recovery was doubted, the mini-rally suspected, and most were convinced that consumers and businesses certainly wouldn't be buying computers, gadgets, and networking gear (where Atheros butters its corporate toast).

Atheros returned more than 110% from that point, about 90 percentage points better than the broader market, because what everyone "knew," and feared, doesn't appear to be playing out. Sure, we have a weak recovery, if we have one at all, but we've stopped accelerating down the hill. As the dive in chip sales flattened, the stock reacted accordingly.

Same story, different sector
In August, I was asked to talk about Google and tech stocks on CNBC's "Closing Bell," because tech stocks were the new cool thing again, I guess. As one member of the parade of bland men in suits, I was hoping to distinguish myself -- at least somewhat -- from the crowd by refusing to play the hot sector game. In fact, as I explained to "Money Honey" Maria Bartiromo, the concept of the hot sector makes me uneasy. By the time a sector has attracted attention, many of the stocks in it have risen, some nonsensically, and bargains are harder to find. Enthusiasm for what's already popular might get you face time on CNBC, but it's also likely to put your portfolio on long-term life support. I told her we'd been buying tech back in May, before it got hot. (I don't know if my impertinence will get me a return engagement. But Foolishness is more important than popularity.)

As Buffett has put it, you pay a high price for a cheery consensus. Luckily, the converse is also true. You get a bargain price for fear and loathing. That's why, to the extent that a "trees-not-forest" investor like me is interested in sectors at all, I'm much more interested in groups of companies that are feared or openly reviled. And right now, I'm having a hard time thinking of a sector that is as crazy as health care.

For most of the past year, its returns were lackluster. But recently, as the health-care reform bills have stalled in Congress, the entire sector has rallied.

However, that 24% return makes it a middle-of-the-pack performer, and individual health-care companies can deviate wildly from that mean. As you can see, health care can be a tough sector, even if you exclude the drops in uber-volatile drug and biotech stocks. The last six months have provided a sickening ride for the holders of these companies, even while the broader market has surged ahead.

Data from Capital IQ, a division of Standard & Poor's.

On the other hand, there have been some major winners in the space, some of which were losers not too long ago.

Data from Capital IQ, a division of Standard & Poor's.

Foolish final thought
Figuring out what to buy, and when, is always the difficulty in investing, but I think you get a head start if you look where others aren't looking, or where they're so busy screaming that they're not thinking. I think one of the ways you can beat Mr. Market is by looking in hated sectors for great companies, and buying the babies, so to speak, while they're being tossed out with the bath water. Given the angst and rancor of the health-care debate, I think you ought to devote a portion of your stock research to this sector.

At Motley Fool Hidden Gems, where we focus on small-cap companies that we believe have the potential to become large winners, we're even putting our money where my mouth is. My team has doubled down on its work in the health-care sector. We were recent buyers of cash-flow stalwart IMS Health, which received a buyout offer only weeks later, giving us a quick 40% gain in only two months. It doesn't always work out that quickly, but we're convinced that when you concentrate on good companies in misunderstood or maligned sectors, you make your own good luck. That's why despite the health-care rally, we've continued to add promising health-care small caps to our portfolio candidates, looking for growing, cash-rich companies making must-have devices and providing must-have services -- companies that should thrive no matter which way Congress veers in the months ahead.

If you'd like to see where we hope to profit from Obamacare, along with our special video valuations, our weekly video stock updates, and our in-depth portfolio and watchlist reports (updated two times per month), a risk free trial is just a click away.

This article was originally published on August 25, 2009. It has been updated.

Seth Jayson is Co-advisor of Motley Fool Hidden Gems. Atheros and IMS Health are Hidden Gems recommendation. Google is a Motley Fool Rule Breakers recommendation. The Motley Fool owns shares of Atheros and IMS Health.