A 'Pivotal Binary Event' Is Coming For Healthcare Stocks

In a report published Thursday, Leerink analyst Ana Gupte, Ph.D. detailed a conference call with MEDACorp specialists following the Supreme Court's oral arguments on the challenge to the Federal Exchange Subsidies.

Speaking to Gupte included a former D-House Representative as well as an Insurance Commissioner, the other a Supreme Court specialist who was live in the courtroom during the arguments.

"The odds of a favorable outcome for the Government look better than before the hearings, though still viewed by our panelists as a 50:50 tossup with Chief Justice Roberts and Justice Kennedy as swing votes," Gupte wrote. "In the event the challenge to the subsidies is upheld, our panelists see low odds of successful Federal legislation to re-establish subsidies, while State ideology is still the dominant limitation in adoption of workarounds."

Gupte added that while the odds of a favorable outcome for the government are higher, it is prudent to remind investors of 2012 where the final ruling did not mirror the expectations post oral arguments in March which caused the sector to give up all gains.

The analyst added that the end of June/early July ruling represents a "pivotal binary event" for the Hospital coverage, leading to a more bullish view of the group as a whole.

Company Specific Commentary

Gupte suggested that investors remain more bullish on Managed Care companies that hold much lower exposure to this "binary event" and superior near and long-term fundamentals. Among coverage, Humana Inc (NYSE: HUM) has the maximum earnings exposure to Federal Exchanges (2 percent), followed by Aetna Inc (NYSE: AET) and Centene Corp (NYSE: CNC) at 1 percent while the others have less than 1 percent exposure.

Gupte also recommended Universal Health Services, Inc. (NYSE: UHS), HCA Holdings Inc (NYSE: HCA) and Community Health Systems (NYSE: CYH) as "selective stock opportunities rated Outperform."