Wednesday, December 12, 2012

Buy Hospitals Ahead of Obamacare Ruling: Citi

Hospital stocks have basically traded flat this year, with five of the seven covered by Citi analyst Gary Taylor in negative territory for the year. But that could change soon.

The Supreme Court is expected to announce its ruling on President Obama’s Affordable Care Act sometime this month, and the “risk/reward looks favorable” for hospital stocks, Taylor argues. Here’s how he figures it:

If the court upholds the entire law, hospital stocks could jump at least 15% on the day of the decision.

If the court says that it is unconstitutional to make people buy health insurance (the “individual mandate”) but upholds the rest of the law, stocks could get a 5% to 10% bump. Taylor sees this as the most likely outcome.

If the court strikes down the entire law, the stocks could fall 5% to 10%, and “trade toward trough EBITDA valuations (low-5 times forward, stock prices about 30% lower) in the throes of the January 2013 fiscal debate.” That, however, would be the “most unlikely outcome,” he writes.

Taylor’s favorite names include Universal Health Services (UHS) and HCA (HCA).

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