Cramer has identified a correlation in the market that can be tracked quite reliably from the March low. What is it? Obama’s disapproval rating. How closely does Obama’s disapproval rate align with the actual market? If you take a close look, Cramer points out that the charts are practically identical, with disapproval for the President rising in tandem with the market’s huge run from the big March bottom. Coincidence? Cramer doesn’t think so.
The President’s agenda had investors worried about many parts of the market, but as the President becomes less popular - and correspondingly less powerful - the threat to those industries has waned and the entire market has rallied, says Cramer.
If some of Obama’s plans don’t work out - plans which much of Wall Street considers to be bad for business – such as card check, forced arbitration for unions, cap-and-trade and health care reform… As more people disapprove of the President,there’s nothing to be scared of, says Cramer.
And what is the sector most weighed down by the Obama agenda? Health care.
The charts are telling Cramer that the strategy is to get more healthcare into your portfolio and to go with gold as a hedge against the dollar. He sees the possibility that the entire health care complex could move much higher if Obama’s approval falls. If Obama has squandered much of his political capital, the defeat of his potentially damaging legislation may be more likely, and good for investors in those stocks.
Cramer sees HMOs as some of the best opportunities both among the health care stocks and in the general market, seeing this as a multiple expansion story.
This is a multiple expansion story, with the HMOs trading at depressed P/E multiples because investors don’t want to pay much for future earnings that may be in jeopardy. Cramer’s picks here are Wellpoint , which is trading at about 8 times expected 2010 EPS, and Triple-S, which is smaller and more speculative… and trading at 7.6 times 2010 earnings.
Historically, Cramer points out, these stocks have traded at an average of 13 to 14 times earnings, and the only thing keeping them down where they are now is the possibility of a destructive healthcare reform bill, which is becoming less likely. Cramer sees P/E multiples returning to their historical averages in the next 12 months if Obama’s plans fail or get significantly watered down.
Cramer points out that even if Wellpoint traded up to just 12 times earnings, you could be looking at a 35% gain, and a 57% gain at Triple-S. Once the fear of the government disappears, investors will be willing to pay much more for their earnings, Cramer says.
What’s the bottom line? Obama’s unpopularity on the rise and with this, his agenda is imperiled. This should encourage you to buy the stocks of companies that stood to be hurt by the President’s agenda, especially in health care stocks and HMOs in particular that are due to go much higher thanks to multiple expansion. “We've been positive about this group since it became clear that the agenda's stumbling, now it's time to go pedal to the metal on this beaten down sector,” says Cramer.
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