The news: The Senate reveals its plans to replace ObamaCare today. Like seemingly everyone else, it has me looking at health-care and biotech stocks.
My investment thoughts about the news: Sell health-care provider stocks like Aetna (AET) and Cigna (CI), and buy biotechs like Celgene (CELG), Gilead Sciences (GILD) and Amgen (AMGN).
While investors have been walking up the health-care providers, it’s a very risky proposition. I see the US going to more of a “single-payer system,“ in which the government ultimately controls all the payments and provides insurance for the entire population. As much as we want to believe President Trump will open the whole system to free-market forces – allowing providers to charge whatever they want (and it will be a LOT, that is why investors are bidding these stocks up right now) – the reality is that the US will more closely resemble the socialist models of Canada, Great Britain and Germany.
The impact: The government won’t put health-care companies out of business but by turning health care into more of a commodity service it will force returns to be shockingly lower than most investors anticipate. Providers will choke that down in order to maintain both revenues and their near monopoly in the system. Their role will be similar to what Fannie Mae and Freddie Mac do now in the financial system; they’ll be important players, but terrible investments thanks to quasi-government control.
Biotech stocks, on the other hand, will continue to flourish. There’s always be a new demand for drugs that better our lives; regardless of government controls, there will always be ample funds to pay for these medicines. Life-saving drugs that may not be covered under new government-controlled policies will still come to market, possibly exist only in private markets that wealthy buyers have access to.
My strategy from this point: This is long-term stuff, trends I will watch over time. Today, with so much secrecy over what is in the Senate plan, I’m watching health-care and biotechs, not trading them.
Jeff Bishop is lead trader at TopStockPicks.com. He runs short-term trading strategies, using stocks, options and leveraged ETFs. At the time this article was published on RagingBull.com, he had no positions or orders in health-care and biotech ETFs and was not planning to trade within either industry on June 22.