Aside from an educated guess, little real analysis can predict a ruling that has at least a half-dozen possible results for a law that affects wide swathes of the healthcare industry.
"It's this never-never land," said Tim Nelson, a healthcare analyst with Nuveen Asset Management. "We're waiting for the clouds to clear, and we'll reassess what the fundamental environment looks like when we know what the rules are."
That has led some on Wall Street to devise complex strategies for profiting from the ruling expected by the end of the month - or at least to hedge their portfolios against significant losses.
They include spreading bets between healthcare sectors whose shares will respond in opposite directions based on a given ruling.
If the law is struck down, for example, stocks of hospital companies such as HCA Holdings Inc or Tenet Healthcare Corp and health insurers that specialize in Medicaid programs for the poor, like Centene Corp or Molina Healthcare Inc, are expected to suffer as they lose out on an expansion of coverage for at least 30 million uninsured Americans.
The same decision could boost shares of larger insurers like Aetna Inc or WellPoint Inc as they avert stricter regulations and higher costs mandated by the law.
CRT Capital Group, an institutional broker-dealer, said its clients were asking for ways to trade healthcare. It is recommending options strategies that amount to bullish bets on three stocks: UnitedHealth Group Inc, the largest and most diversified health insurer; HCA, the largest hospital chain; and rehabilitative services provider Healthsouth Corp.
"We expect that if you put all of these trades on collectively, you would end up making money regardless of the outcome," said Michael Khouw, head of equity derivatives for CRT Capital, noting that the strategy excludes any broader market moves.
Michael Gregory manages two healthcare funds for an investment firm affiliated with Highland Capital Management LP. He plans to keep equivalent positions in large health insurers, Medicaid insurers and hospital chains.
"We are trying to protect downside exposure in our positions and in the fund for any outcome of the Supreme Court decision," Gregory said.
WEIGHING THE POSSIBILITIES
The prevailing view before the court held oral arguments in late March was that the law - Obama's signature domestic policy achievement passed in 2010 - would be upheld.
But based on the tone of questioning from the high court's justices, investors and analysts project that it is more likely that they will overturn the provision at the heart of the law - a requirement that Americans buy health coverage or pay a penalty, known as the individual mandate.
On Intrade, a popular online betting site for political events, the latest contracts reflected a 70 percent chance the individual mandate would be ruled unconstitutional, up from trades in the mid-30s just before the oral arguments.
Striking down the mandate alone would spook investors in health insurers, because of fears people would buy insurance only when they become sick, driving up companies' costs.
Analysts believe, however, that the court would also shoot down associated provisions that require health insurers enroll people regardless of health status, a more palatable result for the insurance stocks.
Invalidating the entire law would likely hurt shares of hospital companies, which stand to increase the number of paying patients who otherwise might seek care for free. Some analysts estimate the stocks could fall as much as 10 percent.
Shares of Medicaid insurers also might drop 10 percent or more on the law's demise as they would not benefit from a planned expansion of the government-supported program.
But a decision that negates the whole legislation is expected to send shares of larger, more diversified insurers higher as they would stand to avoid such measures as government review of premium rate increases, requirements of spending on medical care and fees on the sector starting in 2014.
"You throw the whole thing out, the group is going to rally 5 to 10 percent," said David Heupel, a healthcare analyst with Thrivent Investment Management. "A lot of this money that we assumed was going away because of reform, managed care will get to keep."
FEASTING ON THE AFTERMATH
Citigroup analyst Carl McDonald, who covers health insurers, told clients recently that the best trading strategy into the decision is to hold an equal dollar amount of commercial insurers, which have large businesses serving employers, and Medicaid insurers.
Combining the probabilities of six possible decisions and their expected stock reactions should yield a return of 2.2 percent under his strategy, McDonald said in a research note.
Aside from UnitedHealth, commercial insurers that serve employers might include WellPoint, Aetna and Coventry Health Care Inc. Medicaid-focused insurers include Amerigroup Corp, Centene, Molina, and WellCare Health Plans Inc.
McDonald calculated that a strategy of holding only the commercial stocks would lead to returns of 2.9 percent, when all the probabilities are considered, but he was hesitant to back this plan because of the potential downside.
"We see ... two potential outcomes where the loss from being long just the commercial names could be 10-15 percent, which could occur if the Supreme Court surprised most observers and just struck the individual mandate," McDonald said.
It is the potential for such sharp declines - however remote - that will keep many long-term investors away from shares of insurers and hospital chains until after the ruling.
"It would take a pretty strong stomach to do it ahead of the decision," said Chris Konstantinos, a portfolio manager with Riverfront Investment Group. "I would be surprised to see the stocks bid up ahead of that."
Les Funtleyder, a portfolio manager at Miller Tabak, is banking on sharp reactions after the decision as a chance to scoop up his favored stocks, such as UnitedHealth or Community Health Systems Inc, the No. 2 U.S. hospital chain.
"Because we're long-term opportunistic investors, if there's an over-reaction, which we highly suspect there will be one way or the other, we'll likely take advantage of that," Funtleyder said. "You're talking about a trading event - at best a couple of days - and we're looking out for the future."
(Reporting by Lewis Krauskopf; editing by Michele Gershberg and Matthew Lewis)
By Lewis Krauskopf
Stocks treated in this article : Aetna Inc.
, AMERIGROUP Corporation
, Centene Corp
, Coventry Health Care, Inc.
, Community Health Systems
, HCA Holdings Inc
, HEALTHSOUTH Corp.
, Molina Healthcare, Inc.
, Tenet Healthcare Corporation
, UnitedHealth Group Inc.
, WellCare Health Plans, Inc.
, WellPoint, Inc.