Retailers May Shake Healthcare: 4 Stocks For A Fit Portfolio

Speculation is rife that retail major Walmart (NYSE:WMT) will acquire health insurer Humana (NYSE:HUM). Walmart is not the first retailer showing interest in the healthcare space. Recently, Amazon (NASDAQ:AMZN) entered into joint venture with JP Morgan and Berkshire Hathaway (NYSE:BRKa) to manage insurance for their employees. The company also expressed acute interest in pharmacy business.

Retailers have upped their ante for the nearly $3-trillion healthcare sector, which accounts for approximately 18% of U.S. GDP. Centers for Medicare and Medicaid Services states that total healthcare spending in the United States climbed to $3.4 trillion in 2016 and is expected to reach $5.5 trillion by 2020. The sheer size of this ever-growing market, which is much in need of innovation, has attracted retailers that are always sniffing out business opportunities. And retailers are right in doing so for there is little doubt that spending on medical care will continue to rise.

Despite huge sums of money spent on healthcare in the United States (the costliest in the world), the system is stymied with administrative inefficiencies, opaque prices and customer dissatisfaction. Warren Buffett recently made a statement that has gone viral: “The ballooning costs of healthcare act as a hungry tapeworm on the American economy.” These inconsistencies provide smart businesses with solid opportunity.

Not just retailers, other household names like Apple (NASDAQ:AAPL), Uber and Google (NASDAQ:GOOGL), with their unique technologies have also expressed their intention to make it big in the healthcare space.

How Walmart is Strategizing

Walmart, having a market capitalization of nearly $263 billion, is aiming to diversify into healthcare, to drive more traffic to its 4,700 U.S. stores.

Acquiring Humana could help Walmart jump-start this effort and give it greater clout in the healthcare industry, according to Larry Levitt, senior vice president at the Kaiser Family Foundation, a health care research center.

Walmart is not new to the healthcare business. It already runs a large pharmacy business with outlets in many of its stores. Now, Walmart is eyeing the lucrative medicare business provided to the surging baby boomers population. Per Kantar Consulting, Walmart’s shoppers mix has an average age of more than 50 years. A better way to generate revenues from this customer base would be to sell them their desired healthcare product/services.

For Walmart, Humana seems the best fit given that both entities have been in partnership for eight years for selling co-branded prescription drug benefits for Medicare recipients. This leads to savings on certain drugs bought at Walmart’s pharmacies. Humana’s clinics along with Walmart pharmacies should provide the companies great cross-selling opportunities.

Walmart is now exploring ways to extend this relationship with Humana and market participants are anticipating a merger between them. The rationale for a merger looks even more compelling against the backdrop of increased risk of losing out to Amazon, which has already dipped its feet into the healthcare space. Walmart is already faced with waning brick-and-mortar sales given significant competition from online sales posed by Amazon. An early entry via an established player in the healthcare space will help Walmart save its ground.

How is Amazon Playing?

Recently, CNBC in one of its reports, stated that Amazon’s entry into healthcare is no more than speculation. Recent actions by Amazon, which includes searching for a CEO to lead its healthcare joint venture formed with JP Morgan and Berkshire Hathaway, planning something big in the pharmacy space, and a provision to offer its services to healthcare customers via its cloud business, AWS, corroborates its headway in healthcare.

Jeff Bezos, the founder of Amazon had expressed his healthcare bent at the Vanity Fair New Establishment Summit in October 2016. He had said, “I think healthcare is going to be one of those industries that is elevated and made better by machine learning and artificial intelligence. And I actually think Echo and Alexa do have a role to play in that.”

Disruption in the Cards?

There is no doubt that the entry of these retailers (especially Amazon which has successfully turned the tide in its favor in whatever business it has laid its hands on till now) will widely unsettle the healthcare sector.

These retailers, with their established brand, huge customer data, cutting-edge technology, and superior product and services, should lead to a radical healthcare transformation. It is expected that the solutions created by them will to a large extent solve the three main challenges of the healthcare sector— access, quality and cost. A shift from “one size fits all care treatment” to “tailor made care” should be in vogue, as these customer-centric companies try to design customer-specific products and services compared with traditional healthcare players that have hardly ever extended such care to customers.

Considering the health insurance industry, which was concentrated with a handful of big players who commanded product pricing and service offerings and had an upper hand in dealing with customers, will find themselves in a radically changed scenario. Players in this space have already had to make fundamental changes in their business operations and attitude since the enactment of Obamacare in 2010 that put a check on malpractices to protect customers’ interest. Now, the entry of players that are already well-established in their own fields and enjoy customer loyalty, will give the traditional healthcare players a jolt.

The need of the hour for healthcare entities is razor-sharp focus on innovation and service to protect their share in the market that they have ruled for ages. What’s more, they must do so to save their space from retail invasion.

However, these changes are not going to happen soon. Major players in this space are still well poised for long-term growth since they have established businesses and know the in and out of it. Only they need to catch up with customers’ needs.

Stocks to Pick

The healthcare space still looks attractive given that demand for its products and services is ever growing thanks to changing demographic, growing income, low unemployment and jobless claims. A strong economy will enable people to spend more on their healthcare needs. Despite the changing industry trends there are many companies with robust business lines, which have already been proactive in a changing industry environment. Investing in these players will generate strong returns.

We have shortlisted some stocks from the healthcare space that carry a strong Zacks Rank # 1 (Strong Buy) or 2 (Buy) and have a Value Style Score of A or B. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2 offer the best opportunities in the value investing space. These stocks have also outperformed their respective industry’s growth in a year’s time. Adding these stocks to an investment portfolio will fetch smart returns.

Centene Corp. (NYSE:CNC) is a diversified, multi-national healthcare enterprise that provides a portfolio of services to government-sponsored and commercial healthcare programs, focusing on under-insured and uninsured individuals.

In a years’ time, the stock has returned 49%, compared with its industry’s growth of 32%. Centene has a Value Score of A and a Zacks Rank #1. The Zacks Consensus Estimate for current-year earnings has been revised 21% upward over the last 60 days. The company beat earnings estimates in each of the last four quarters, with an average positive surprise of 9.8%.

Anthem, Inc. (NYSE:ANTM) a health care company, provides medical products through its subsidiaries. It operates through Commercial, Consumer and Other segments.

In a years’ time, the stock has returned 34%, compared with its industry’s growth of 32%. Anthem has seen the Zacks Consensus Estimate for current-year earnings being revised 10.9% upward over the last 60 days. The company surpassed earnings estimates in each of the last four quarters with an average positive surprise of 9.6%. It has a Value Score of B and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Magellan Health, Inc. (NASDAQ:MGLN) is a specialty healthcare manager, focusing on some of the complex and costly healthcare services.

In a years’ time, the stock has returned 56%, compared with its industry’s growth of 32%.. The company has a Value Score of B and a Zacks Rank #2. The Zacks Consensus Estimate for current-year earnings has moved up 11.6% over the last 60 days. The company surpassed earnings estimates in three of the four quarters.

AMN Healthcare Services Inc. (NYSE:AMN) is a travel healthcare staffing company. It recruits and places nurses, physicians and other healthcare professionals in travel or permanent assignments in acute-care facilities, physician practice groups and other healthcare facilities.

In a year, the stock has returned 44%, compared with its industry growth of 4.5%. The company has a Value Score of B and a Zacks Rank #2. It has seen the Zacks Consensus Estimate for current-year earnings being revised 20% upward over the last 60 days. The company surpassed earnings estimates in three of the four reported quarters, with an average positive surprise of 5%.

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