XBI SPDR S&P Biotech

The Affordable Care Act—often known as Obamacare—has faced an incredible amount of scrutiny over the past few years. First, the law was fought in Congress, then in the court system, and it had to battle through a plethora of technology issues as of late as well.

However, following the pathetic launch of the Obamacare exchanges, it does appear as if the issues are finally starting to be ironed out. Now some consumers have bought new health insurance plans, or have signed up for the expanded Medicare program in order to obtain coverage.

Impact

No matter what you think of the law, you can’t deny that this Act will have a huge impact on the health care market and securities trading in this industry. And while a number of health insurance companies might face some rockiness in the beginning—as there is a fear that the only people signing up will be extremely sick—other corners of the health care world might benefit from the law (see 2 Great Healthcare ETFs in Focus).

This is particularly true for those that are assisting companies in transferring workers over to the exchanges, or for firms that are engaged in producing drugs. After all, these companies could see a spike in demand, especially if more firms push their workers to the exchanges, or if new health care coverage allows a variety of consumers to afford drugs.

So no matter what you think about the politics of Obamacare, as an investor, it may be important to put these issues aside and consider which health care stocks and funds are best positioned for this new environment. For these investors, we have highlighted a few top picks below which could be well-positioned to benefit from the Obamacare changes, and may outperform their peers in the health care market as favorable trends lineup behind the following four picks:

PowerShares Dynamic Pharmaceuticals ETF (PJP)

With expanded health care coverage, drugs may be more accessible to those with insurance plans. And if greater numbers are (hopefully) able to afford medicine, the pharma sector could be a huge beneficiary, greatly boosting their sales numbers for many of their top drugs.

One great way to play this sector is with PJP, a popular ETF from PowerShares. The fund tracks the Dynamic Pharmaceutical Intellidex Index holding roughly 30 stocks in its portfolio. The fund has a definite large cap focus, though it is pretty spread out, assigning no more than 5.5% to any one stock (read The Comprehensive Guide to Pharma ETFs).

Some biotech firms take the top two spots—CELG and AMGN—though Bristol-Myers Squibb (BMY), Johnson & Johnson (JNJ), and Merck (MRK) round out the top five. Clearly, the fund has a large cap focus, though small and mid caps do account for roughly 40% of the portfolio.

Towers Watson (TW)

TW has had a focus on human resource consulting, and it has been making a bigger push into helping firms understand health exchanges and their options in this space too. To this end, TW recently acquired Liazon Corp for $215 million, a move that could further make the company a go to option for companies seeking to put employees on health care exchanges.

The stock is also looking pretty good from an earnings estimate perspective as well, with decent earnings growth expected for both the current year and the next year. Estimates have really surged for the next year time period, with earnings growth of nearly 10% expected now for the time frame (see all the Health Care ETFs here).

This has actually been enough to bump up TW to a Zacks #1 Rank (Strong Buy), suggesting it will be an outperformer in the months ahead. So the Obamacare boost—along with strength in the rest of TW’s core business—could really make this a stock worth looking at to open up 2014.

SPDR S&P Biotechnology ETF (XBI)

Much like the pharma space, the biotechnology sector could benefit from more consumers having insurance, and thereby the resources to use its products. And given some product pipeline issues, many biotech companies are interesting takeover targets as well, particularly if Obamacare drives new revenues for drug producers in the months and years ahead.

One easy, and lower risk, way to tap into this trend is with XBI from State Street. This fund holds about 60 biotech companies in its portfolio, though it uses an equal weight methodology. Due to this, large caps make up less than 15% of the fund, giving huge weights to takeover target drug firms in the small and micro cap space (see Play Surging Health Care with These Small Cap ETFs).

This approach could be great for investors who like the idea of a biotechnology play, but are concerned about the extreme volatility in the space. With this equal weight approach, no one company makes up more than 3% of assets, though if the ACA boosts demand and spurs more M&A activity, a rising tide could lift all boats in this space.

Impax Laboratories (IPXL)

Another area that could see a nice boost is the generic drug market. This space, much like the broad pharma sector, could see a huge boost as more people have the insurance to pay for these drugs. And best of all, the segment currently has a Zacks Industry Rank in the top 25% so clearly analysts are liking the broad story here.

One company in particular that seems well-positioned is IPXL, a firm that develops both generics and its own drugs. And with a market cap below $2 billion, it could be an interesting takeover target as well (read 4 Ways to Play the Bullish Trend in Healthcare with ETFs).

Earnings estimates for this firm have also been impressive lately, with the company expected to breakeven this quarter, after analysts were looking for a 17 cent loss per share just two months ago. Current year estimates have doubled in the same time frame, showcasing why this a Zacks #1 Ranked stock, and why investors might want to look to this firm to benefit from a bigger push to generics under the Affordable Care Act.

Bottom Line

No matter what you think about the Affordable Care Act, it does appear as though it is here to stay, at least for the near term. Given this, it might be best to accept this reality and invest in a health care sector that is going to have to adapt to the flurry of new rules and codes that this law calls for.

Fortunately, there are a number of stocks and ETFs which look to benefit from Obamacare, and could be winners thanks to more people having insurance. So put politics aside and consider buying any of the securities listed above to profit from this massive and transformative health care law, as the full weight of this new program hits the market in 2014.

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IMPAX LABORATRS (IPXL): Free Stock Analysis Report
 
PWRSH-DYN PHARM (PJP): ETF Research Reports
 
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SPDR-SP BIOTECH (XBI): ETF Research Reports
 
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