Do you like the heath care sector as an investment theme in 2013 and beyond?
Even if you're ambivalent about Obamacare or totally opposed to it, some version will become law in 2014. Love it or hate it, it has the potential to boost health insurance stocks in a big way going forward.
Even though the government is in shutdown mode as I write, on Oct. 1 the government-subsidized health insurance exchanges and state insurance exchanges were scheduled to come online.
Little is known yet concerning how many uninsured Americans will pay a large percentage of their disposable income to buy health insurance through the insurance supermarkets called "exchanges."
According to one survey sponsored by Citigroup, the number of people who may initially sign up could be as high as 4 million.
Time will tell. What we do know is that there's an overlooked form of insurance that's been going on for years. It's called Medicaid, and it's a government-sponsored health plan for the economically challenged. More than 29 million Americans have their Medicaid benefits managed by private insurers.
Medicaid is in the midst of its biggest growth spurt since it was created back in the 1960s. It provides a huge amount of revenue for insurance companies that specialize in Medicaid and also in Medicare.
Molina manages Medicaid coverage in several states, including California, Florida and Illinois. Medicaid is the state and federally funded program that provides health coverage for the poor and disabled people in most states.
Molina is a shareholder-friendly company as well. On Oct.3 the company announced its board had approved a plan to buy back up to $50 million of the company's stock.
The Long Beach, Calif., company's repurchase became effective Sept. 30 and extends through the end of the year. It will be funded by existing cash.
This acts like a no-tax, stealth dividend for shareholders because stock buybacks tend to make the outstanding shares dearer and gooses the price higher. Unlike a regular dividend, it's a tax-free benefit.
The new buyback plan replaces a $75 million repurchase program that Molina's board adopted last February. Although the company doesn't pay a dividend yet, as of June 30 MOH had a deep cash cache of around $31.99 per share, so the potential for a future dividend is certainly feasible.
MOH reports its latest quarterly earnings on Oct. 21 and analysts are calling for an enormous increase in earnings-per-share (EPS) from the same quarter last year. From 7 cents a share a year ago to 31 cents a share this year will equate to nearly a 443 percent growth in EPS.
Revenue and sales growth is expected to increase by nearly 12 percent for the latest quarter, but by year's end the annual increase in revenue over 2012 may see a jaw-dropping 771 percent annual improvement.
Analysts expect Molina's EPS to increase 40 percent in 2014 to $2.26, which would make MOH the fastest-growing insurer traced by Thomson Reuters.
The company will apparently be a big beneficiary from the decision so far by 26 states to expand their Medicaid programs. That equals almost $5 billion in added Medicaid expenditures.
WellCare Health Plans has a very similar business model and growth trajectory. WCG provides managed care services targeted to government-sponsored health care programs, focusing on Medicaid and Medicare.
Headquartered in Tampa, WellCare offers a variety of health plans for families, children, and the aged, blind, and disabled, as well as prescription drug plans. The company served approximately 2.8 million members nationwide as of June 30, 2013.
On Oct. 2, WellCare announced that it has added eight new counties across three states to its 2014 Medicare Advantage service area. With the addition of these new counties, WellCare will offer Medicare Advantage plans in 210 counties in 14 states.
WellCare steps into the earnings confessional on Nov.1 and the consensus EPS estimate among analysts is for nearly a 50 percent year-over-year quarterly improvement. The revenue and sales growth increase is also anticipated to be up by an impressive 31 percent for the latest quarter compared with the year-ago quarter.
The one-year stock price chart of WCG versus MOH shows both stocks are trading close to the 52-week highs.
WellCare is expected to finish 2013 with a similar annual EPS than it achieved last year. Revenue is expected to be up 26 percent from the previous year. WCG has a clean balance sheet with total cash per share as of the quarter ending June 30 of $34.59.
It appears that the promising prospects for Medicaid and Medicare insurers are already reflected at current price levels. Molina has had a great run with its share price up over 120 percent in the past 24 months. WellCare has done slightly less than half that well with about a 64 percent two-year price increase.
If the funding and demand for Medicaid increases in the year ahead there are reasons to anticipate more share price growth, especially if one or both companies declare a sustainable dividend.
WCG has a market cap of less than $3.2 billion. MOH is slightly more than half that size weighing in with a market cap of only $1.68 billion. Both these profitable companies may be takeover targets, but MOH seems particularly affordable to a big acquirer who sees a synergistic fit.
If you plan to invest in both these collateral beneficiaries of Obamacare, consider scaling in gradually, buying a third or even half of a position size at a time. You might consider buying these two plus the third big name in this subsector, Centene.
Analysts anticipate CNC to experience a 27 percent jump in EPS next year over this year. The St. Louis company hit a 52-week high on Friday Oct.4 and trades too rich for my appetite at a current PE of 48 and a forward (one-year) PE ratio of almost 19 times earnings.
I'd want to see it correct before I'd nibble on CNC, but MOH and WCG are ripe for scaling into and if shares drop, celebrate and buy some more.
Ready or not, here comes Obamacare, so investors might as well reap the benefits and the companies that will be as well.
—By TheStreet.com contributor Marc Courtenay.
At the time of publication the author had no position in any of the stocks mentioned.