Health Management Value Stocks: Cheap In The Face Of Uncertainty

|
 |  Includes: AET, CI, CNC, HUM
by: George Putnam

Summary

ObamaCare will likely create some great investment opportunities.

Broad trends can't be predicted--focus on traditional valuation measures among the sectors & individual stocks.

These HMO stock picks offer healthy, highly-diversified, value stock potential.

I'm pretty sure that the Affordable Care Act (or ACA, also known as ObamaCare) is going to create some great investment opportunities, but I have no idea what the ultimate effects of the new government programs will be on the different individual stocks and groups of stocks in the healthcare sector. Even though I can't predict the broad trends in the sector, I can still focus on traditional valuation measures among the sectors and individual stocks; and when I do that, the HMO's look pretty cheap almost regardless of what happens with the ACA.

One reason for the cheap valuations is that many investors have been afraid to buy HMO stocks because they don't know exactly how they will be affected by the ACA. I don't know either, but at their current low valuations, I think it is likely that the stocks will go up as the uncertainty dissipates. Also, the ACA is likely to result in more industry consolidation, which could make some of the smaller HMO companies buyout targets.

The four health management companies discussed below represent a range of different market capitalizations, and some occupy specialized niches, but they all appear poised to achieve higher valuations in the not-too-distant future. More healthcare-related value stock picks are detailed in my most recent turnaround investing newsletter.

Aetna (NYSE:AET), whose roots date back to 1850, offers a broad range of insurance and employee benefits products. Management has used acquisitions to help reposition the company, including the purchase of Medicity in early 2011 that expanded its presence in the electronic patient records market and the 2013 acquisition of Coventry Health that better positioned Aetna in the growing Medicare Advantage market. Aetna is also well situated to grow its business outside the U.S.

Centene's (NYSE:CNC) managed care operations span 18 states (primarily Texas, Georgia, Florida and Indiana). Government markets, including Medicare and Medicaid, account for the lion's share of revenues. As states look to private plans as a means to control quality and costs, Centene is well positioned to benefit. The company is also moving into the market for state-based health exchanges. In addition, Centene also operates related businesses, such as pharmacy benefits management, behavioral health and vision care, that provide a measure of diversification. In a consolidating industry, Centene could be an acquisition target.

Cigna (NYSE:CI) is a large diversified provider of employee benefits that range from commercial and government health programs to group disability and life insurance. The company also has a large international presence that offers good growth opportunities. Management has used acquisitions to take advantage of growth sectors such as Medicare Advantage that are being driven by the aging population. Recent results have been a bit light relative to expectations, but Cigna's diversification, international opportunities and strong financials bode well for long-term gains.

Humana (NYSE:HUM), with over 12 million medical coverage memberships, is one of the nation's largest managed care companies. The bottom line has been challenged recently because of the costs of implementing the ACA and other federal programs, but top-line growth remains impressive. This revenue growth should eventually boost profits and the stock price. Humana is also diversifying into new markets, as evidenced by its acquisition of Concentra, an urgent/occupational care provider.

Health Management Stocks

Company

Symbol

Recent Price

52- Week Range

Market Cap. $Bil.

Price to Sales

Forward P/E

Aetna

AET

70.46

76.71-56.05

25.56

0.49

10.0

Centene

CNC

65.51

68.26-45.25

3.78

0.33

14.9

Cigna

CI

77.85

65.18-90.63

21.30

0.66

10.1

Humana

HUM

109.05

119.93-72.13

16.80

0.41

12.7

Click to enlarge

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.