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Check These 3 Health Insurers To Reap High Returns In Q2

By Zacks Investment ResearchStock MarketsApr 04, 2018 09:23PM ET
Check These 3 Health Insurers To Reap High Returns In Q2
By Zacks Investment Research   |  Apr 04, 2018 09:23PM ET
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The health insurers continue to gain traction from increasing enrollment, product development, business diversification, cost-control efforts, increased operating efficiencies and a strong capital position. All these led to both top and bottom-line growth for most players in the field. Many in the industry have also kept raising their full-year guidance at the end of each quarter, thus indicating their rising operational excellence.

Banking on the above positives, the industry has gained nearly 35.9% in a year’s time, outperforming the S&P 500 average of 11.3%. The Zacks HMO industry is placed among the top 21% of the Zacks Ranked industries.

Nevertheless, higher medical costs, public exchange woes, stiff competition, stringent regulations and compliance costs were a drag.

Government Plans Look Lucrative

Despite the prevalent uncertainty surrounding the efforts to repeal and replace Obamacare, the industry continues to put up a good show in 2018. We see sustainable growth potential in expanding government programs. The recent announcement by the Centers for Medicare and Medicaid Services regarding raising 2019 Medicare Advantage reimbursement rate by 3.4% also proves that. This action will definitely attract the private health insurance players with the aim of increasing their managed care participation. Since the government plans have already been highly profitable for health insurers, their increased participation is likely to result in significant top and bottom line growth.

Apart from this upside, an increasing focus on preventive and value-based care, growing accountable care organizations, international business expansion, mergers and acquisitions also keep the industry’s growth trend alive.

Thriving Economy, Rising Interest Rates, Changing Demography Fuel Growth

Growing demand for health insurance products and services on the back of changing demographics, increasing income, low unemployment and jobless claims continue to aid the insurance stocks. A strong economy enables people to spend more on their healthcare needs that again opens up scope for the health insurers. An ageing U.S. population also boosts demand for Medicare Advantage plans, especially designed for the retirees to control the rising Medicare costs. This in turn encourages more participation from health insurers ensuring profitability on this ground.

Additionally, the recent interest rate hike by the Federal Reserve also bodes well for health insurers. The managed care companies benefit from the rising rates owing to a generally sizeable investment securities portfolio coupled with manageable debt levels.

Consolidation in the Industry

Of late, increasing consolidation has been a major phenomenon in the health insurance industry. This in turn leads to market concentration, which should help players enhance their operational scale as well as gain a substantial market share.

Health insurers are trying to integrate with pharmacy benefits managers to streamline and cut costs in the drug supply chain. The recently announced acquisitions of Express Scripts Holding Company (NASDAQ:ESRX) by Cigna Corporation (NYSE:CI) and Aetna Inc. (NYSE:AET) by CVS Health Corporation (NYSE:CVS) underline the growing trend of two healthcare sector industries coming together to amicably provide a comprehensive care.

Retailers have also expressed their interest in the health insurance industry. Humana has been in talks to get acquired by Walmart (NYSE:WMT) Inc. Eyeing the rewarding Medicare business provided to the surging baby boomers population, the retail major intends to invest big time in the health insurance industry. Recently, Amazon (NASDAQ:AMZN) has also entered into a joint venture with JP Morgan and Berkshire Hathaway (NYSE:BRKa) to manage insurance for their employees and is further looking for a CEO to helm its healthcare joint venture.

Stocks to Bet on Before Q2

We zeroed in on three stocks, poised for an earnings beat in the second quarter of 2018. Our proven model shows that stocks with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) and 3 (Hold) when combined with a positive Earnings ESP, have the potential to beat on earnings. Our screening also pin points stocks having witnessed a positive estimate revision in the past 60 days.

Humana Inc. (NYSE:HUM) is one of the largest health care plan providers in the United States. The company’s Zacks Rank #3 and an Earnings ESP of +0.41% strengthen its potential for a second-quarter earnings beat. The stock has also seen the Zacks Consensus Estimate for current-year earnings being revised 8.2% upward in the last 60 days.

The company’s expected long-term earnings growth rate is pegged at 13.4%, above the industry average of 13.3. Shares of Humana have surged 36.6%, outperforming the industry’s rally of 35.9% in a year’s time.

Magellan Health Inc. (NASDAQ:MGLN) is an American for-profit managed health care company. The company’s Zacks Rank #2 and an Earnings ESP of +2.54% heighten its potential for a second-quarter beat. The stock has also seen the Zacks Consensus Estimate for 2018 earnings being revised 11.6% upward in the last 60 days.

The expected long-term earnings growth rate for the company is 15%, better than the industry average. Shares of Magellan Health have surged 61.6%, outperforming the industry’s rise in a year’s time.

Molina Healthcare, Inc. (NYSE:MOH) is a multi-state managed care organization, participating exclusively in government-sponsored healthcare programs. The company’s Zacks Rank of 3 and an Earnings ESP of +8.38% bolster its possibility for a second-quarter success. The stock has also seen the Zacks Consensus Estimate for 2018 bottom line being moved 4.2% north in the last 60 days.

The company’s estimated long-term earnings growth rate stands at 15.3%, more than the industry average. Shares of Molina Healthcare have soared 75.1%, outperforming the industry’s increase in the last 12 months.

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Check These 3 Health Insurers To Reap High Returns In Q2

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Check These 3 Health Insurers To Reap High Returns In Q2

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