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Why Obamacare is good for health care stocks

Talking Numbers

Putting the political and social aspects of Obamacare aside, could this attempt to shake up a sector that's 18% of the nation's GDP actually be good at least for companies in health care?

After years of public debate, a government shutdown, and much acrimony, the Affordable Care Act – dubbed "Obamacare" by critics and supporters alike – launched last month and so far, it's been, well, a debacle. However, putting the political and social aspects of Obamacare aside, could this attempt to shake up a sector that's 18% of the nation's GDP actually be good at least for companies in health care?

Much of the focus the past several days has been on the messy implementation of Healthcare.gov. On the first day of its launch, only six people were able to enroll for health insurance using the site. This improved dramatically to 248 people the second day. At that rate, all of the estimated 48 million Americans without insurance will finally get coverage using Healthcare.gov in just 530 years.

(Read: When insurers drop policies: Three stories)

However, health care stocks haven't been slow to move. Since the Affordable Care Act (ACA) was signed into law in 2010, health care stocks have outperformed the S&P 500. Using the SPRD Health Care ETF (the XLV) as a measure, health care companies have gained nearly 64% since March 23, 2010. That a little bit better than the S&P 500's 52% rise. Since the start of 2013, health care companies are up 32%, about 9% better than the S&P 500 Index.

More than a third of the XLV is made up of four companies: Johnson & Johnson, Pfizer, Merck, and Gilead. They're all up since 2010 but biotech Gilead is has nearly tripled since that time, nearly doubling in 2013 alone. The company hit its all-time high on Wednesday.

Company Ticker Weight Since ACA was signed (3/23/2010) YTD
Johnson & Johnson JNJ 12.76% 41.44% 32.11%
Pfizer PFE 10.61% 81.02% 22.33%
Merck MRK 7.65% 22.28% 10.14%
Gilead GILD 4.50% 191.18% 93.85%
Bristol-Myers Squibb BMY 4.11% 87.50% 61.15%
Amgen AMGN 4.08% 93.87% 34.73%
Abbvie ABBV 3.66% 49.39% 41.83%
Unitedhealth Group UNH 3.51% 96.63% 25.85%
Biogen Idec BIIB 3.11% 323.04% 66.83%
Express Scripts ESRX 2.9% 20.87% 15.78%
SPDR Health Care ETF XLV 63.63% 32.32%
S&P 500 51.72% 23.16%

But all may not be so good for the sector given the problems that have arisen from carrying out Obamacare. According to Andrew Busch, editor and publisher of The Busch Report, health care companies as a sector may have a tough time ahead but there are a couple of subsectors that will stand out.

(Watch: Obamacare lacks key cost control: Mayo Clinic CEO)

"Obamacare has created some uncertainty for this sector," says Busch. "Obamacare is going to try to constrain some costs. They're going to focus on drug companies [and] pharmaceuticals more than health care overall. So, within the sector, there are some different plays that are working quite well, and that's going to continue going forward."

Ultimately, Busch sees the demographic trend of an aging population as winning the day for the health care sector.

Jeff Tomasulo, managing partner at Belpointe Alternative Investments, says the charts show that the recent move up in the XLV has not been smooth but, rather, quite volatile. Tomasulo sees the XLV trading in an upward trend channel but warns that the 20-week moving average is a critical support level. Should it be broken, Tomasulo believes the XLV will see a significant pullback.

"You have to take caution here," says Tomasulo. "You look at the last two years. This is a tremendous move."

What's next for health care given the difficulties in implementation of the Affordable Care Act? Watch the video above to see Busch on the fundamentals and Tomasulo on the technicals as they analyze the sector and its ETF, the XLV.

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