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Stocks with room to grow in the age of Obamacare

Americans have been talking about the Affordable Care Act – known colloquially as Obamacare – for well on three years now. Its provisions are well known to those who have studied it (if not the general public). And it has survived the primary challenge to its validity in the U.S. Supreme Court.

At this point, then, are there any stocks that can still gain from the country's new health-care law? Surely, the future is now clearer and all this information must be reflected in today's share prices.

Or perhaps not. Analysts have some suggestions for stocks that may still have room to grow in the age of Obamacare.

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If you're looking for a large-capitalization, contrarian play, insurer UnitedHealth Group Inc. is worth a look, analysts say.

In the wake of the Supreme Court decision last week, broad-based, private-sector-oriented insurers such as UnitedHealth have seen their shares slide. (Insurers that focused primarily on Medicare, which is slated to add millions of patients, gained.)

The UnitedHealth drop — 7 per cent since June 28 — presents an opportunity to buy a company that Ana Gupte of Bernstein Research says "is highly diversified and will win under all scenarios."

"UnitedHealth is particularly well positioned for Obamacare with its scale and diversified book of business across all health-benefit segments, its exposure to the growing government segments of Medicare, Medicaid and in the future the dual eligibles," she says.

("Dual eligibles" are patients enrolled in both Medicaid, the program for the poor, and Medicare, the program for the aged.)

At current prices below $55 (U.S.) a share, UnitedHealth now has a forward price-to-earnings ratio under 11 — an attractive price for a company still expected to grow earnings per share (EPS) at a double-digit rate in coming years.

At CRT Capital Group LLC, managing director Sheryl R. Skolnick has a $72 price target for UnitedHealth, based on 13.1 times her 2013 EPS estimate. She had previously listed the company as one of three "most immune" to a Supreme Court decision that would have repealed the Affordable Care Act — and she's mystified at the recent declines, observing that UnitedHealth and other insurers "just got handed 30 million new members on a silver platter."

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The market did a better job of recognizing the benefits to Colorado-based Air Methods Corp., a provider of air-ambulance services; it has gained 10 per cent since the Supreme Court decision. Yet, some analysts suggest that still doesn't capture the gains Air Methods could see under the Affordable Care Act.

Analyst Ryan Daniels of William Blair & Co. notes that roughly 14 per cent of Air Methods' first-quarter patient transports were uninsured. For those patients, "Air Methods collects almost nothing for its services – despite a very high cost to provide the air medical transportation."

Here's what Mr. Daniels, who has an "outperform" rating on the shares, did to estimate a "quite conservative" upside: He assumes that the uninsured level drops to 3 per cent, the level the company is experiencing in Massachusetts, which has near-universal health care. All those other currently uninsured would then begin to fall under Medicaid – the lowest reimbursement category in U.S. health insurance.

The result? An extra $19-million in revenue and 84 cents of earnings per share. (Air Methods recorded EPS of $4.15 in the past 12 months.)

The analyst squad at Oppenheimer & Co. Inc., also with an "outperform" rating on Air Methods, has an even more robust number. They estimate that moving all the insured patients to Medicaid could provide $21-million in earnings before interest, taxes, depreciation and amortization (EBITDA), and $1 in EPS.

"Because the math is still quite fuzzy, and most investors are not looking as far as 2014, we do not believe the stock is pricing in much if any benefit from reform," they wrote on June 28, as the stock was rising from $89.45 to $94.91. (It closed Tuesday at $98.55, giving it a healthy but not outrageous forward P/E of 18.4.)

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Numbers like that are why analyst Matt J. Weight of Feltl & Co. used the phrase "cleared for takeoff" in initiating coverage on the company June 25 with a "buy" and $105 target price. Between Air Methods and UnitedHealth, there seem to be at least a couple of opportunities to still head skyward in U.S. health care.

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About the Author
Business and investing reporter and columnist

A business journalist since 1994, David Milstead began writing for The Globe and Mail in 2009. During eight years at the Rocky Mountain News in Denver, Colo., he individually or jointly won nine national awards from SABEW, the Society of American Business Editors and Writers. He has also worked at the Wall Street Journal. More

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