Healthcare Stocks: The Diagnosis For 2010

By Sham Gad | January 06, 2010 AAA

Along with the economic recovery, the healthcare issue may be the next big buzz heading into 2010. As we get closer and closer to a final healthcare bill by both branches of Congress, the question for investors is whether healthcare providers will be better or worse off in the years to come. My bet is on a favorable outcome for insurers.

Public Option Doubtful
With each passage of an amended version of the healthcare bill, the public option becomes less and less significant to the point where a public health option is unlikely to exist or it will appear in a very diluted form. In either case, the major healthcare providers should benefit from healthcare reform. The likely outcome seems to be subsidized government healthcare where consumers get to choose their provider and in one way or another get a rate reduction via Uncle Sam. It's not clear whether the insurance companies themselves will bear a portion of this cost.

A Win-Win Outcome
Either way, it seems to be a win-win outcome for health insurers over the long-run. The ultimate goal of healthcare reform is to insure the millions of uninsured Americans while reducing how much we spend on healthcare. Many of those uninsured will be picked up by the private insurers. That means opportunity for the biggest players, namely Unitedhealth Group (NYSE:UNH), Wellpoint (NYSE:WLP) and Aetna (NYSE:AET). All three of these companies are heading into 2010 trading at multiples ranging from 10-12 times earnings, one of the lowest valuations in the S&P 500. Should the ultimate healthcare reform bill continue to favor less of a public option, healthcare could be a strong performer in 2010. On the Medicare and Medicaid side, in addition to the above names, some pure play names include WellCare (NYSE:WCG) and Molina Healthcare (NYSE:MOH), both of which trade at excellent valuations. (To learn more about analyzing healthcare stocks, see Investing In The Healthcare Sector.)

The Bottom Line
In any event, healthcare providers continue to trade at valuations below what these types of businesses should command. But with some sort of healthcare reform likely, the potential for any additional business could make healthcare insurers one of the best sectors in 2010.

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