There’s a dark cloud on the horizon regarding Obamacare. (Yes, the cloud’s always been there, but now the bad weather is arriving.) News articles are making it increasingly clear that UnitedHealthcare might leave the Obamacare exchanges if it can’t find a way to turn a profit, and that Aetna and Anthem might follow suit. Many other lesser-known insurance companies have already given up on Obamacare and exited the health insurance exchanges.
Investors must face this bald fact: If big health insurance companies leave the exchanges, stocks are going to fall throughout that sector, because the market will be panicked over their profit prospects. The baby will be thrown out with the bathwater.
I anticipate a prolonged drop in their stock prices, followed by a several-month period during which the stock prices stabilize. Behind the scenes, insurance companies will assess the fallout on their balance sheets, while stock portfolio managers pay close attention to earnings reports and statements from corporate management. Once it becomes clear that earnings estimates are stable—lacking ugly downside surprises—then Wall Street will once again be able to make informed buying decisions on these stocks. The most profitable companies will lead the sector’s rebound.
This potentially ugly scenario has not begun. I’m just letting you know what to expect, so that when it happens, you don’t jump in to bargain hunt, three days after the stocks begin falling. You will have many, many months to make informed buying decisions; there will be no hurry.
