Sometimes bad news, any news, is good enough for Wall Street, Cramer told viewers on Wednesday. The Street fears uncertainty more than almost any other factor, and it often sparks a sell-off in whatever stock or sector’s in question. That’s why health care lately had taken such a beating – no one knew what reforms President Obama had planned.
Well, investors seem to have put down their hammers, so to speak, as the health-care stocks have rallied. Cramer attributes this to one thing: clarity. Washington’s potential changes are starting to come into focus, at least the price tag is, and that takes some pressure off these stocks. So much so that Cramer was willing to recommend one on the group’s eventual rebound: WellPoint.
Specifically, Senator Max Baucus, chair of the Finance Committee, said the bill’s passing would be slowed in an attempt to keep the cost under $1 trillion, a much smaller price tag than many people probably expected. That, Cramer thinks, is reason enough to exhale. And the aforementioned rally is proof that Wall Street is no longer holding its breath.
Cramer likened this moment to a similar one in the 1990s when Hillary Clinton’s proposed health-care plan fell through. The related stocks had dropped to a price-to-earning ratio of 9.5 in anticipation of what might happen and quickly sprang back to their tradition P/E of 13 once the deal was scrapped. WellPoint could benefit significantly if this trend plays out again.
Cramer hasn’t been a fan of health maintenance organizations. Not after Cigna , UnitedHealth and Aetna all bought back stock at high prices. But he thinks WellPoint should be trading at a higher multiple than just eight times 2010 earnings. More like 10 or 11, he said, which would propel this $47 stock to the $60s. If Obama’s reforms fail entirely and HMOs return to their traditional 13 or 14 multiple, WellPoint could reach $100.
Another positive for WellPoint is the sale of its pharmacy-benefit-management division to Express Scripts for $4.68 billion in cash, a near windfall for this $23 billion company. While Cramer isn’t happy with WellPoint’s decision to use the cash to buy back stock, the sale should push earnings well above 2009 consensus estimates. That in turn will push the share price higher.
Health-care stocks are starting to look, well, healthy again. Cramer’s way to play it – WellPoint.
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