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HMO Industry Surges Almost 4 Times S&P 500: 4 Picks

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The Health Maintenance Organization (HMO) industry has been one of the solid gainers so far this year, despite the stiff regulations binding it. Interest rate hike and trade war disturbances, which caused far and wide fluctuation to returns of many industries like utilities, banks, automobiles, manufacturing, have little or almost no effect on this industry of the health care sector.

The S&P 500 Managed Health Care Index has gained 23.7% in a year's time compared with the 6.12% rise in the S&P 500 Index.

The ruling factors of the HMO industry are the many state and federal regulations that monitor their working and affect their business performance. The most stringent regulatory reform was the Affordable Care Act that was enacted in 2010. But insurers have synced their operations in line with the regulatory mandates, which are now paying off.

The year also saw many trials by the Trump administration to repeal the ACA, which however, failed to take place. The changes, if would have taken place, would have led insurers to again adapt to new regulations, thus subjecting them to again redo some parts of their business workings.
But mid-term elections, which saw the change in Republican control in the house of representatives, have now further pushed backed or almost put off the table any changes that would be made to the ACA in the near term. This implies that the existing regulations would continue and health insurers will not have to commit resources to fine tune their operations at least for now.

An increase in employment has also induced demand for health insurance from employers for their employees, aiding revenue growth for the health insurance companies. Also, changes in demography with baby boomers retiring in hordes each day, have driven up demand for Medicare plans of the HMOs.

Moreover, business growing outside the health insurance realm has diversified earnings of the players in the industry. The poster child of the same is the development of the Optum unit of UnitedHealth, which has contributed to an increasing proportion of revenues to its consolidated revenues and falls outside the regulations that bind the business of health insurance. Other companies such as Humana and Anthem have also been consistently growing their health service business.

Zacks Industry Rank and Returns

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Medical-HMO, which is an 11-stock group within the broader Zacks  Medical sector, currently carries a Zacks Industry Rank #38, which places it at the top 15% of 257 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. In a year’s time, the industry’s earnings estimate for the current year has gone up 17.2%.

The Zacks Medial-HMO on industry, which is a stock group within the broader Zacks Medical Sector, has outperformed both the S&P 500 and its own Medical sector over the past year.

We see that the stocks in this industry have collectively gained 29.3% over the past year, while the Zacks S&P 500 composite and Zacks Medical Sector have rallied 4.7% and 4.5%, respectively.

What’s in Store for 2019?

The industry is expected to continue with its stellar performance in 2019, with the easing out of regulatory uncertainty, investment in technological investment and upgrade, application of blockchain technology, growth of new business units, international expansion, better claims handling, medical cost management, mergers and acquisitions and healthy balance sheets.

Also, the midterm elections, which saw the passage of ballot initiatives to expand Medicaid under the ACA, are a positive for the industry. This bodes well for HMOs as increasing member enrollment in Medicaid should aid their top line.

The stabilization of health insurance exchanges is also favorable. Administrative actions (such as encouraging people to maintain continuous coverage and attracting younger and healthier people to join the market) taken last year by the CMS  have paid off as some of the players that exited the health insurance exchanges in many markets over 2016 and 2017 have returned. Some of the returning companies are Anthem, Molina and Cigna.

All in all the health insurance industry is slated for another good ride in 2019. So picking up some solid stocks from this space should be a good investment move. Each of these stocks have has witnessed an upward revision in earnings estimates for 2018 and 2019 and carries a strong Zacks Rank.

Top Picks

Anthem, Inc. (ANTM - Free Report) operates as a health benefits company in the United States. The company should see top-line growth from an increase in enrollment in Medicare Advantage plans. A strong balance sheet with positive cash flows should help it to invest in growth.

The company currently has a Zacks Rank #2 and VGM Score of B. The Zacks Consensus Estimate for its current-year earnings and 2019 moved up 1.2% and 0.4%, respectively, in the last 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Humana Inc. (HUM - Free Report) should gain from its growing Medicare business, as the same is in high demand from the retiring baby boomer population. Also, its health services business provides diversification benefits.

The company currently has a Zacks Rank #2 and VGM Score of A. The Zacks Consensus Estimate for its current-year earnings and 2019 moved up 1.8% and 1%, respectively, in the last 30 days.

Cigna Corp. (CI - Free Report) is a health benefits company and its acquisition of Express Scripts, a pharmacy benefits manger (due to be closed this month) bodes well for its long-term growth, which will help it to expand vertically. It company currently has a Zacks Rank #1. The Zacks Consensus Estimate for its current-year earnings and 2019 moved up 0.9% and 3.9%, respectively, in the last 30 days.

Molina Healthcare Inc. (MOH - Free Report) deals mainly in government-related plans such as Medicaid  and is expected to gain from the Medicaid expansion. The company currently has a Zacks Rank #1 and Value Score of B. The Zacks Consensus Estimate for its current-year earnings and 2019 moved up 10.9% and 10.4%, respectively, in the last 30 days.

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