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What to buy and sell under health reform

The early part of any economic recovery is always a good time to put money to work. It's not only a rising tide that lifts many boats, but it's also a great time for entrepreneurs with new ideas.

There are both winners and losers in health reform.

(The famous charging bull statue in Bowling Green, downtown Manhattan, often associated with Merrill Lynch, now part of Bank of America.)

Signing of the bill seemed to release some pent-up demand from investors yesterday, the Dow rising over 100 points. Markets like certainty, the signing of the bill delivers certainty, so now stocks can be evaluated again based on fundamentals.

Beyond that, you can expect some types of stocks to come under pressure.

  • Hospital equipment stocks, especially imaging companies and high-end gear makers like Intuitive Surgical, which has been like an Internet stock lately anyway (a P/E of 59 when Google's is 26) are bound to come under pressure. Such purchases will need new justifications.
  • Name brand drug companies may have trouble over time, although shares like those of Merck are already pretty beaten down. (P/Es of 7 are usually reserved for cigarette and newspaper companies.) Expect slower growth as competition with generics grows.
  • Hospital companies, which may face a glut of beds. Expect some doctor-owned hospitals to come on the market, depressing values.

Sadness will not be universal. As David Ignatius of The Washington Post notes, "can anticipate a whole lot more government money headed its way." Who stands to gain?

  • Health IT companies, which in addition to the stimulus may now get the chance to run health exchanges. Many of the largest imaging companies, like GE, have protected themselves against falling imaging revenues by innovating in IT with systems like Qualibria.
  • Some health insurers, especially those that can control costs through vertical integration, will benefit. Having a thumb on costs will become a clearer competitive advantage.
  • IT companies not now in health care, like payment processors, smart card providers, and others in back-end services, are going to see big contracts.
  • Nursing home companies with a wide variety of service levels, ranging from visiting nurses to intense nursing care, are going to benefit from having an assured flow of funds and new customers.
  • Generic drug makers are bound to see more prescriptions, not only as new customers come on who were previously uninsured, but as prescriptions for name brand alternatives come under pressure.

The early part of any economic recovery is always a good time to put money to work. It's not only a rising tide that lifts many boats, but it's also a great time for entrepreneurs with new ideas.

There are lots of opportunities for such entrepreneurs in health care. Some people are going to get rich. I doubt even the President would object if you are one of them.