The Best Stocks to Invest in Obamacare

By Markets Fool.com

Don't like Obamacare? That's understandable, but have you noticed what it's done to your healthcare returns?

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During the past three years, the S&P 500 Health Care Index outperformed the broader market, posting an impressive annual 27% total return. In fact, the nearly $3 trillion healthcare industry -- long ago considered a place for conservative investors -- now exhibits the kind of sizzling returns those looking for hot growth stocks salivate over.

The big gains aren't just due to the Affordable Care Act. Add in an aging global population, a growing middle class in emerging markets, a frenzy of consolidation and mergers, biotechs pumping out drugs like there's no tomorrow -- whew! Let's get down to how you might keep the supersized returns coming.

Here's the skinny on three promising healthcare stocks, and why I believe they stand out above the rest for those looking for Obamacare-driven gains.

HCA Holdings(NYSE: HCA),the nation's largest hospital chain, has seen soaring admissions, a trend that started in the middle of 2014 after years of less crowded waiting rooms.

HCA's patient traffic grew almost 7%last quarter over the prior-year period. HCA also increased its revenue per admission. Better yet, those gains are flowing right to HCA's bottom line, thanks toan ACA-fueled reduction in uncompensated care.

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Nationwide, about 4% of total hospital admissions are at HCA facilities. On top of that, the company also focuses on the Sun Belt, giving it particularly strong access to fast-growing urban markets, as well as the 65-and-older population.

HCA's underlying business is strong and growing; earnings should rise 17% this year, and HCA could get a further lift if Florida and other states expand Medicaid.

Molina mops up with Medicaid
Speaking of expanded Medicaid, Molina Healthcare Inc. (NYSE: MOH) could be a big winner, according to Motley Fool healthcare expert Keith Speights. As Keith recently pointed out, Medicaid has been the managed care company's primary focus for 30 years.

Molina beat earnings estimates in the last two quarters by at least 10%, andthe company expects earnings to surge more than 80% in fiscal 2015.

Since Molina is tied at the hip to Medicaid, the trend for states to expand their Medicaid program is giving the company a big lift. Pennsylvania, Montana, and Indiana all got on the gravy train of federal dollars -- in exchange for Medicaid expansion -- within the past nine months. That leaves 21 states that are sticking to their former decision to opt out. But in three of them -- Florida, Alaska, and Utah -- expansion is under discussion.

Is Molina a good buy? Molina's forward-looking price-to-earnings ratio is 18. As Keith pointed out, that's not bad considering the likelihood for continued strong growth. I'd say this looks like an enticing way to play the tremendous opportunity arising from the recent changes in the healthcare system.

Actavis erases its wrinkles with Botox
Winning in the generic-drug space isn't easy, since competition tends to undermine margins. But generic-drugmaker Actavis PLC (NYSE: ACT) has been on fire for years, and once again reported exceptional performance last quarter. That included a 59% increasein net revenue.

To withstand the competition, generic-drug makers face constant pressure to expand the scale and scope of their operations through new drug approvals and mergers and acquisitions. Actavis is doing exactly that. The company has grown from collecting $3.5 billion in revenue in 2010 to anticipated revenue of $23 billion this year, thanks to its Allergan acquisition.

Actavis has forecast $1.8 billion in synergies from buying the Botox maker. CEO Brent Saunders has also set a goal to "generate organic revenue growth at an annual growth rate of at least 10% for the foreseeable future."

That's an audacious goal for a pharma company this big. But as I have previouslywritten, I think Actavis can do it. In addition to continued label expansion for Botox -- the neurotoxin has 90 new uses with patents pending -- the company is also seeing continued strong growth in its generic drugs, including a recently launched version of OxyContin. All in all, Actavis looks poised to capitalize on upward trends in drug usage as well as pressure from payers to choose low-cost generic versions of drugs.

The joker in the deck: King v. Burwell
There is, however, a wild card for Obamacare healthcare stocks. The Supreme Court is preparing to rule on whether certain Obamacare subsidies are legal.If these federally-given subsidies are struck down, expect tremors throughout the entire healthcare sector.

In my opinion, the most vulnerable of these three stocks to King v. Burwell is HCA Holdings. But HCA should quickly rebound from an adverse ruling, since Medicaid expansion is what's really driving hospital earnings, and that's not a trend likely to reverse anytime soon.

According to the Centers for Medicare & Medicaid Services, total U.S. healthcare spending will grow by almost 6% annually through 2023.

Let's have some fun. Let's assume that healthcare stock gains roughly follow the growth of the healthcare market -- which, of course, doesn't always happen over the short term. But taking a longer-term view, that kind of growth means you could theoretically just about throw a dart at a list of healthcare stocks and on average get a 6% annual gain over the next decade, if the CMS projections are right.

What if you are a little more choosy about your stocks and do your homework? Well, I think you'll find yourself blowing by that 6%. But then, "Anything can happen at any time in the market," as Warren Buffet said, so don't quote me on that.

The article The Best Stocks to Invest in Obamacare originally appeared on Fool.com.

Cheryl Swanson owns shares of Actavis. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.