Health Care Reform: Five Ways to Profit With Biotech Stocks & Bond Funds
by Marc Lichtenfeld, Advisory Panelist
Wednesday, July 1, 2009: Issue #1031
There are a number of health care reform plans on the drawing boards right now, and they all seem to come with mind-numbing sticker shock. The administration’s new plan and Senator Kennedy’s plan are both estimated to cost $1 trillion over 10 years.
I’ll believe that when I see it. When was the last time the government completed any project on budget?
And I’m not the only one with doubts.
Health Systems Innovations, a health care consultant that has worked with private health insurers, estimates that Senator Kennedy’s bill would cost $4 trillion over 10 years.
Ouch…
Should a health care plan be passed that even resembles anything like the current proposals, $2 trillion in final costs would be a minor miracle.
A trillion here, a trillion there. Pretty soon, you’re talking about real money.
As these health care reforms gather momentum, I’m going to explore a few more investments that should thrive in the face of a major health care system overhaul, regardless of any health care reform plan that may be passed…
Health Care Reform : Protecting Against Inflation With Bond Funds
Despite the President’s popularity, he’s not likely to get everything he wants. Some sort of compromise is to be expected. One thing we can assume is that the cost of any health care reform plan – regardless of whose it is – will be a 13-figure number (i.e. more than $1 trillion).
On a macroeconomic level, that would likely be inflationary and cause bond prices to decline. So if you’re a bond bear, here are two instruments for you…
- UltraShort 20+ Year Treasury ProShares (NYSE: TBT): This ETF is not for the faint-hearted. It seeks to perform at twice the inverse results of the Lehman Brothers 20+ Year U.S. Treasury Index. So if the Index drops 5%, TBT should rise about 10%.
- ProFunds Rising Rate Opportunity (RRPIX): This is a mutual fund that also seeks the inverse performance of the bond market. Its results aim to correspond to 125% of the inverse of the daily movement of the 30-year Treasury bond.
Profit From Health Care Reform with Biotech & Selling Put Options
Recently while researching stocks that would profit during the health care reform process, I discussed the attractiveness of investing in biotech companies that treat rare diseases.
One of the companies I’ve recently discussed, Genzyme (Nasdaq: GENZ), had a major setback when it disclosed problems at one of its manufacturing facilities. The stock price took an immediate hit.
I believe these difficulties are temporary and I still like the company. But if you’d prefer to reduce your risk further, you can look at selling put options on GENZ at a lower strike price. My colleague Lee Lowell just talked about a put selling strategy earlier this week.
I explained to Lee why I like GENZ, but wanted a good put-selling trade for investors who want to own the stock at a lower price. Here’s what he suggested…
- Sell the October 2009 $47.50 puts, currently trading at $1.50 on the bid. This means for every put that you sell, you will collect $150.
- Keep in mind that one put contract represents 100 shares.
- If GENZ never sees the $47.50 strike, you keep the $150.
- If the stock drops to or below $47.50 at expiration, you’ll be required to buy the stock for $47.50 (100 shares of GENZ for every put contract you sell). But remember that you collected $1.50 already, reducing your cost basis to $46 per share.
So if you like GENZ, but would prefer to own it at a lower price, this is one trade to consider.
Health Care Reform: Two Biotech Companies Set For Profits
I’ve recently suggested a few other biotech stocks to my subscribers, including:
- Best-in-class generic drugmaker Teva Pharmaceuticals (Nasdaq: TEVA).
- Another generic drugmaker to look at is Watson Pharmaceuticals (NYSE: WPI). Watson just announced its acquisition of privately held Arrow Group, a generic biotech drugmaker, with significant international operations.I like this move by Watson, as it broadens the company’s reach both in products and markets served.
The bottom line is that while health care reform could very well change the investing landscape within the sector, you can always find opportunities if you know where to look.
Good investing,
Marc Lichtenfeld
- Healthcare Stocks… Are They Truly Recession-Proof?
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One Response to “Health Care Reform: Five Ways to Profit With Biotech Stocks & Bond Funds”
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July 1st, 2009 at 8:51 am
They used to say just a few short years ago, “a billion here, a billion there. Pretty soon, you’re talking about real money.
Now we say, “a trillion here, a trillion there. Pretty soon, you’re talking about real money.”
A more apropriate version for today’s environment could go something like, “a trillion here, a trillion there. Pretty soon, you’re not talking about money at all.” hahaha….
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