Three Court Press

 | Jul 03, 2012 | 1:00 PM EDT
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Three recent court decisions have newly painted election-tinted investment themes.

1) The Supreme Court's ruling on Obamacare, which could make specialized Medicaid HMOs pure "blue stocks" for November.

2) The Washington D.C. Circuit Court's upholding of federal rules to cap greenhouse gas emissions, which puts another nail in the coffin for coal companies while creating fresh challenges for electric utilities and power producers.

3) The D.C. District Court's ruling against the Obama Education Department's "Gainful Employment" regulations, which is a dagger threatening federal funding to for-profit colleges.

While much has been made of the Supreme Court's decision to preserve the Affordable Care Act's (ACA) individual mandate, the parallel decision to restrict the fed's ability to force states to provide enhanced Medicaid coverage (i.e., by threatening funding cutoff under the existing Great Society program) threw a potential curve ball at stakeholders in the Medicaid HMOs. Those companies have been expected to lobby the states aggressively to sign onto the expanded federal/state entitlement envisioned under Obamacare. But while investors initially rallied shares of Molina Healthcare (MOH), Centene (CNC) and Amerigroup (AGP), traders came to understand that 26 Republican governors hold real power to refuse signing up for the Medicaid expansion -- or to leverage such a threat to force broader, mixed-bag reforms.

In effect, aside from what sanguine observers referred to as the irresistible allure of "free money" (under the ACA's funding-match incentives), these budget-strained state executives would likely be aided and exhorted in their rebellion should Mitt Romney win the presidency and Republicans take back the Senate.

In other words, MOH, CNC and AGP may now be pure plays on an Obama re-election, which could be expected to sustain a narrow Democratic Senate majority as well. Odds of a Republican sweep are high enough to warrant caution for Obamacare winners, such as the Medicaid HMOs, and might seem even stronger if Friday's June employment numbers change the campaign narrative yet again.

As for the greenhouse gas ruling, it puts another nail in the coffin for coal producers such as Arch (ACI), Peabody (BTU) and Cloud Peak (CLD), which were already being strangled by the economics of cheaper natural gas prices. That event led Jim Cramer to predict that "there would never be another coal plant built in America again." Nevertheless, there is at least some hope that the coal industry, and newly challenged/co-dependent utilities and power producers, could enjoy a better backdrop if Republicans gain in the elections.

Meanwhile, restoration of at least some tax-rate differential for income from corporate dividends would seem more likely under Romney, whose economic advisor, Glenn Hubbard, was the principal advocate for the expiring 15% dividend tax rate when he served as CEA Chairman under George W. Bush. So the utilities could look interesting in the wake of the GHG ruling and in the event of a rightward political turn.

Finally, a third notable play could be set up by the D.C. District Court's June 30 ruling against the Obama Education Department's "Gainful Employment" (GE) regulations, which have threatened to deny federal funding to for-profit colleges such as Corinthian Colleges (COCO) and Education Management (EDMC). These companies might be hard pressed to meet the GE regulations' data-driven cutoff thresholds regarding the debt-to-income ratios of a school's graduates as well as the percentage of students who repay their loans. For this and other reasons, they have seemed pure "red," or leveraged to Romney/Republican prospects in November -- although the court has just done much of what prop school industry stakeholders have been hoping that a Republican White House and Congress might do if they gain power after November.

In any event, investing in the group is hardly for the faint of heart. Indeed, the Tea Party-fed gains that produced a more industry-friendly House GOP majority after the 2010 elections helped to unlock a 50% rally in shares of prop school leader Apollo (APOL) between late 2010 and mid-January 2012. But from that point, several factors conspired to more than wipe those gains out. That may be setting up higher-quality names (including APOL, DeVry (DV), Capella Education (CPLA), American Public Education (APEI), Strayer Education (STRA)) to rally again, if Congress realigns to also produce a more friendly Republican Senate after November.

If a realignment rally does emerge, you may want to be nimble -- and to get out before austerity minded conservatives, perhaps next spring, try to cut the deficit by paring back Pell Grants. That money is a crucial source of funding for prop schools, community colleges and traditional four-year universities alike. While I disagree with those suggesting that a Republican sweep might thus be as bad as a national Democratic sweep, the herd might shoot at the first sounds of budgetary saber rattling, before asking questions later.

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