Buying and Selling Obamacare

09/03/2009 1:00 pm EST


Michael Shulman

Editor, Short-Side Trader

Michael Shulman, editor of ChangeWave Shorts, says cost control will be the name of the game in health care, and he has one Buy and one Sell recommendation based on that.

It is time to short the Obama health care plan, which will be shredded, gutted, downsized ... maybe even killed. Whatever Congress decides on the issue, the focus of the health care industry will become cost control.

What stock is most likely to suffer? The stock of the company that arguably sells the most expensive health care widget—Intuitive Surgical (NYSE: ISRG). ISRG is experiencing flattening growth and has a trailing P/E of 45x.
The California-based company makes robotic systems to aide surgeons. They have great products, but they are large, incredibly complex, obscenely expensive, and require massive amounts of training and support.

Simply put, now is not the time for hospitals to buy multimillion-dollar toys, and it is hard for them to get cash if they do decide they want to buy them.  [With ISRG trading over $210], now is not the time to short the stock based on its technicals. But it has stalled a bit, and once it begins to roll over. There is serious money to be made if you buy put options on the stock.

Regardless of whether health care reform passes, and in what form, the central message to the industries that comprise 16%-17% of the economy is cost control.

Health care inflation has been going up faster than general inflation since the passage of Medicare, and drug costs have been going up faster than general health care inflation for most of that time.

So, how can you play this?

The answer is generics. And the world's largest and best generics drug manufacturer is Teva Pharmaceutical Industries (Nasdaq: TEVA).

I have followed Teva for seven years, and management has never let me down. The company dominates the generics market and has 150-200 new generic formulations in front of the Food and Drug Administration at any given time.

This proprietary product line gives Teva a huge advantage. Teva has the highest margins of any generics maker, which means it can fund the development of more generics faster than its competitor.

Health care reform and cost controls are not the only catalysts for Teva. In November 2010, Pfizer's (NYSE: PFE) anticholesterol medication, Lipitor, the world's largest-selling prescription drug ($11 billion), loses its patent. Depending on Teva's taste for legal action and where it stands on line with the FDA, it can market a generic in November or within six months—and that will catalyze not only the stock, but the business as well.

The only risk is a temporary drop in the stock if tensions in the Middle East flare up—Teva is based in Israel. But in the past, it has taken [only] a couple of days for people to realize almost all the company's operations worth mentioning are outside Israel.

So, to make money on health care reform, bet on cost control and look at Teva call options. (The stock closed below $51 Wednesday, near its 52-week high—Editor.)

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