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The health insurance industry has been embroiled in a regulatory web since the Affordable Care Act (ACA, or Obamacare) was passed in 2010. Even though industry players eventually warmed up to the law over the following years by adjusting their operations to the changed environment, they may have to go through the process all over again as the Trump administration attempts to replace ACA with its own version.  

Many in the market doubt Congress’s ability to repeal and replace ACA, but the U.S. House of Representatives has already passed the American Health Care Act (ACHA) that would replace Obamacare. The bill is now in front of the Senate, though many suspect that the upper chamber plans to come up with a version of its own instead of starting out with the House version.

In the meantime, the Congressional Budget Office (CBO) has estimated that while the proposed legislation will bring down the deficit and cut government spending, it will also cause the loss of insurance for 23 million people over the following 10 years. The CBO projections have likely made it difficult for a number of GOP senators to easily stand behind the House version.

The health insurance industry’s strong performance this year reflects the market’s understanding that these healthcare operators remain well placed, irrespective of the legislation’s fate. Many other operators in the healthcare space, like hospital operators and drug companies, are not in that category.

The Zacks HMO industry is currently up +14% in the year-to-date period, outperforming the S&P 500 index’s +8.1% gain.

Why Health Insurance Stocks Still Have Some Upside Left

While the industry has outperformed the broader market lately, but valuations are far from stretched and leave room for further upside going forward.

The Zacks HMO industry is currently trading at 16.7X forward 12-month consensus EPS estimates, which compares to 18.2X for the S&P 500 index as a whole. Over the last 5 years, the industry has traded in a range of 8.6X to 18X, with a median of 14.3X. Please note that the low valuation point (8.6X multiple) was in mid-2012 when there was all-around uncertainty about the impact of ACA on the industry’s business.

What this shows is that while HMO stocks aren’t cheap, they are not nose-bleed expensive either.

Zacks Industry Rank

Within the Zacks Industry classification, health insurers are broadly grouped in the Medical sector (one of the 16 Zacks sectors).

We rank 265 industries in the 16 Zacks sectors based on the earnings outlook and fundamental strength of the constituent companies in each industry. We put our industries into two groups: the top half (industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank). Over the last 10 years, using a one-week rebalance, the top half beat the bottom half by more than twice as much. The Zacks Industry Rank is #74 (top 28%). The ranking is available on the Zacks Industry Rank page.

Please note that the Zacks Rank for stocks, which is the core of our Industry Outlook, has an impressive track record -- verified by outside auditors -- of foretelling stock prices, particularly over the short term (1 to 3 months). The rank, along with Earnings ESP, helps in predicting the probability of earnings surprises.

Stocks Worth Considering

Investors can consider the following HMO stocks that have solid fundamentals along with a favorable Zacks Rank.

WellCare Health Plans, Inc. (WCG - Free Report) provides managed care services for government-sponsored health care programs. It operates through three segments: Medicaid Health Plans, Medicare Health Plans, and Medicare PDPs. The stock currently has a Zacks Rank #1 (Strong Buy) and surpassed earnings estimates in each of the trailing four quarters, with an average beat of 59%. It company has a long-term expected growth rate of 13%. You can see the complete list of today’s Zacks #1 Rank stocks here.

UnitedHealth Group Inc. (UNH - Free Report) is a diversified health and well-being company in the United States. The company offers consumer-oriented health benefit plans and services, health care coverage, and health and well-being services to individuals aged 50 and older. The stock currently has a Zacks Rank #2 (Buy) and surpassed earnings estimates in each of  the trailing four quarters, with an average beat of 4.7%. It company has a long-term expected growth rate of 13.4%.

Nobilis Health Corp. (HLTH - Free Report) own and manage ambulatory and acute care facilities for healthcare services. In addition, it owns and manages ambulatory surgery centers, acute care hospitals, imaging centers and urgent care clinics. The company operates primarily in Houston, Dallas and Scottsdale, Arizona. Nobilis is headquartered in Houston, Texas. The stock currently has a Zacks Rank #1 and surpassed earnings estimates two of the last four reported quarters, with an average beat of 100.21%.  It company has a long-term expected growth rate of 20%.

Anthem Inc. (ANTM - Free Report) provides medical products through its subsidiaries. It operates through Commercial, Consumer and Other segments. The company offers managed care plans to the large and small employer, individual, Medicaid and senior markets. The stock currently has a Zacks Rank #2 and surpassed earnings estimates in three of the last four reported quarters, with an average beat of 8.36%.  The company has a long-term expected growth rate of 10.3%.

Humana Inc. (HUM - Free Report) is a health services company that facilitates the delivery of health care services through networks of providers to its medical members. The company's products are marketed primarily through health maintenance organizations and preferred provider organizations that encourage or require the use of contracted providers. The stock currently has a Zacks Rank #2 and surpassed earnings estimates in each of the last four reported quarters, with an average beat of 3.75%. The company has a long-term expected growth rate of 13.3%.



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