“The Obama Surprise”

“The biggest surprise of President Obama’s first term could blindside the pundits… infuriate liberals… and create a decades-long string of profits for financial conservatives. I urge you to read on and get all the facts…”

That’s our introduction to the new ad for Philip Durell’s Motley Fool Inside Value newsletter, which aims to be a “deep value” newsletter that typically invests in large, undervalued companies. I’ve covered some of his past picks, and own a few stocks that are in the newsletter’s portfolio — but this appears to be the first brand-new ad from them in quite some time, so let’s have a look.

Inside Value, by the way, has beaten the market over the past one and three-year periods, according to Hulbert [Free 30 Day Trial of MarketWatchs’ Hulbert Interactive Newsletter], but it’s been pretty close (they’re down 33% over the past year, versus 38% for the Wilshire 5000). There is currently only one review on this site for Inside Value, and it’s not very flattering (if you’ve tried the service, please add your thoughts).

The ad starts out by making fun of some of the other pundits who have focused on Obama and the profits his presidency might bring …

“All the media pundits prattling on about this rebound or that rebound… an ‘Obama rally’ or the beginning of some magical new bull market. Goofball catchphrases like ‘just follow the money’… and fruity ideas like ‘Obama 100-day profits’?”

I only point this out because they’re taking a jibe here not just at “media pundits” but at other Motley Fool folks (or their copywriters, at least) — you might remember that Tom and David Gardner were pushing their Motley Fool Stock Advisor newsletter back in January using what they called “Obama’s 100-day Profit Plan.” They’re not alone, of course, almost all the publishers were touting “green” companies or infrastructure picks as “Obama stocks” over the Fall and Winter … but it’s always nice to see a publishing house making fun of … itself, even if it wasn’t intentional.

Well, from what I hear today actually is the 100th day of this presidency … so Obama hype or no, let’s see what Philip Durell thinks we should buy.

A little more from the Foolies …

“This is your opportunity to simplify your life and grow rich — with a handful of safe “inevitable” opportunities

“Given all that’s going on with the economy and stock market these days, you might be wondering if the 2 stocks you’re about to discover are really the best places for your money right now. If so, I congratulate you.

“You see, I’m a skeptical investor, too. That’s why I wouldn’t dream of asking you to simply take my word for it. So let me share something with you…

“The 2 investments you’re about to discover (as your reward for reading this email) were thoroughly researched and are recommended by a remarkable investor who penned the now-legendary Motley Fool special report that projected the current financial fiasco… all the way back in March 2005!”

That begs the question, of course — if he predicted this crisis, why is the portfolio down 11% a year for the past three years? Not a fair question, perhaps, since he focuses on the longer term, but if you’re going to make that claim one might expect that to mean that you profited from it, and by that we’d probably mean something more than beating the market by one or two percentage points during the crisis.

But that’s water under the bridge — which two companies is Durell picking now for our game of Poohsticks?

(Poohsticks, for those not currently living with a five-year-old, is played by dropping two sticks in the water, off a bridge, and going to the other side of the bridge to see which one comes out first — if the water’s slow enough, it’s sort of like patient value investing. Is your stick solid enough to survive the dark area under the bridge while you wait for it to come out? Or did Piglet choose the better stick?)

So first, the ad provides a couple of examples of Philip Durell’s favorite Inside Value picks, Markel and Berkshire Hathaway (I own shares of both of those, by the way), and says that while these are “obvious” value picks for this market and you should consider them, they have two other picks for you today.

What are they? They’re health insurance firms … here’s the background:

“Liberals will howl… media pundits will be confounded AGAIN!

“As surely as night follows day, this worst-case scenario will prove too costly and simply impossible to implement. As financial system bailouts have already stretched the federal budget far too much…

“We project Obama will utilize a select few MCOs (managed care organizations) to implement his plan. And here’s the sweet spot for us — he’s going to be forced to accept 2 publicly traded companies to extend healthcare benefits to the more than 40 million uninsured Americans just as the election cycle comes back into play…

“And here’s where Wall Street and so many investors are missing the boat (you see, our 2 companies have recently dropped down into a perfect buying window)…

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“Yes, this will cut into these companies’ profit margins because of federal reimbursements and higher medical-cost ratios (costs paid divided by premiums received). BUT what these 2 companies will lose in margins, they will more than make up for in the massive volume of new business they’ll be receiving.

“Here’s another inevitable advantage: In the months and years ahead, scalability (which allows companies to become more profitable as fixed costs are spread over a larger revenue base) will become increasingly important…

“And our 2 companies are highly scalable, which will allow them to either wipe out the smaller players or gobble them up. Either way, our stocks will be positioned to pay off in a major way!”

The clues about those two specific companies?

We don’t get any. What you see is what you get.

But I can still make at least an educated guess for you — I’d wager that these two firms are Wellpoint and UnitedHealth Group, two companies that are confirmed to be in the Inside Value portfolio recently (other, somewhat smaller competitors like Humana and Aetna do not appear to be Inside Value picks currently), and that are the kind of large-cap, sector dominating firms that Philip Durell has tended to like in the past. In both cases their shares did take a big dip about two months ago, from which they’ve only partially recovered.

I have never owned a health insurance company so I don’t necessarily understand the business model very well, and they certainly come with some baggage — there are always lawsuits and mergers and acquisitions going on in this business, with both of those firms generally likely to be the acquirers … and they are subject, to some degree, to things like medicare cuts or new federal decrees and regulations, which, as the Fool says, is part of the reason for their generally low prices relative to the market.

That said, this business is becoming dominated by a few large companies (Aetna is the third really big one), and those big insurers often have a lot of leverage with doctors and hospitals, and there is something logical to the point that a rollout of much more universal health care coverage might be made much easier if done in cooperation with these big companies.

I don’t have any idea whether Unitedhealth or Wellpoint are going to be good investments in the decade to come, but they are cheap based on earnings (forward PE of 6 or 7, trailing PE of 8 or 9, both low even for this market). Neither pays a noticeable dividend right now, nor do they carry much debt (though they have other obligations to the folks who carry their insurance). There is some concern about enrollments going down and their revenues getting pressured as employers lay people off, cut health coverage, or force better deals from the insurers.

So … are you interested in buying a health insurer? Think they’ll help the government, get their margins crushed by the feds, or be overall beneficiaries of “universal” health care? Or are they cheap enough that you can stop worrying about those big picture issues that may not go anywhere (like previous healthcare reform) and just buy the shares here? That’s your call — let us know what you think with a comment below.

And if you have any experience with the Fool’s Inside Value newsletter, please share your experience today with a click here. (You can also see all Motley Fool reviews or add your own by clicking here).

Full disclosure: as noted above, I currently own shares in both Markel and Berkshire Hathaway. I will not trade in any stock mentioned here for at least three days.