We’ve officially entered the most wonderful time of year. I’m not talking about the upcoming Thanksgiving holiday, a time for friends, family, food and football. No, I’m talking about open enrollment season!
Well, maybe this isn’t very wonderful for employees given the boring presentations (there’s just no way to make a conversation about premiums and deductibles interesting), but it’s one health insurance companies sure look forward to.
As you may know, health insurance has been a hotly debated topic for some time now. President Trump is trying to lower prescription drug prices, Democratic presidential candidates are promising universal healthcare and there’s now a bipartisan push to end surprise billing. And because it’s become such a major talking point in the presidential election, I don’t expect health insurance to fall off the headlines any time soon.
Clearly, there’s a lot going on in this industry right now, but how are the health insurance companies actually performing? Let’s take a look at two of the big ones: Cigna Corporation (CI) and UnitedHealth Group Incorporated (UNH).
After chopping around for most of the year, both stocks made huge moves in October. The reason was simple: Earnings.
The big move started after UNH reported a strong third-quarter earnings beat and raised its future guidance for the rest of 2019. On October 15, the company reported adjusted earnings per share grew 17% year-to-date to $3.88. Revenue increased 7% year-over-year to $60.4 billion. Analysts were expecting of $3.75 on revenue of $59.62 billion, so UnitedHealth Group posted a 3.5% earnings surprise and a 1.3% revenue surprise.
For the rest of 2019, company management raised its adjusted earnings forecast from $14.70 to $14.90 to $14.90 to $15. This was also above analysts’ estimates for $14.83.
Wall Street cheered the results and the stock popped 5.5% at the open.
On October 31, Cigna posted its own third-quarter results. Just like UnitedHealth, the company topped analysts’ forecasts on the top and bottom lines. Adjusted earnings per share of $4.54 came in above the estimated $4.36, resulting in a 4.10% earnings surprise. Third-quarter revenues of $38.6 billion were well above the estimated $34 billion. So, it posted a 13.5% revenue beat, too.
Cigna also revised its 2019 earnings. The company previously forecasted earnings per share from $16.60 to $16.90, but raised that guidance to $16.80 to $17.00. Revenues were increased from $136 billion to $137 billion to about $138 billion. The stock opened up about 1% higher on the news.
If you look at the chart below, you can see that both stocks had a great October. Cigna (the blue line) and UnitedHealth (the orange line) gained 17.57% and 16.28%, respectively.
That’s a pretty good looking chart! But here’s the thing – it hasn’t been a good year for either company. You can see that in the next chart below.
Since December 31, 2018 to October 31, 2019, Cigna is down 6% while UnitedHealth is up a measly 1.4%, underperforming the S&P 500 significantly. In the same time period, the S&P is up 21.2%.
So, it’s no surprise that the stocks aren’t rated too highly in Portfolio Grader. As you can see below, Cigna earns itself a D-rating, making it an immediate sell.
Its Fundamental Grade is a C. While its sales growth is solid, its operating margin growth leaves a lot to be desired. The D-rating tells us that it is not expanding margins, and its earnings momentum is pretty bad, too. Clearly, investors are noticing this, as its Quantitative Grade is a D. So, the smart money is avoiding the stock.
UnitedHealth’s report card is a bit better. Its total grade is a C, so it’s a hold right now.
While its sales growth isn’t great, the health insurance company’s operating margin growth is much better. It’s also seeing a better return on equity, too. Regardless, given the overall C-rating, it’s not a great buy right now. It was an excellent buy in 2015, which is why I recommended it in my Growth Investor service. We sold it for a stunning 115% gain in September.
Should You Avoid Healthcare Completely?
Now, I’m not saying that you shouldn’t touch healthcare stocks with a ten-foot pole, you just need to be careful in what you invest in. And one stock I really like right now in this space is Veeva Systems Inc. (VEEV).
Veeva Systems is a leading provider of cloud software solutions for the life sciences industry. The company’s solutions help pharmaceutical and life sciences companies use cloud-based architectures and mobile applications for their businesses.
Just this week, the company announced that it had acquired its strategic partner, Physicians World. Together, the two companies will provide a complete solution for virtual events in the healthcare field. Physicians World offers full-service speakers bureau logistics to life sciences companies in the U.S. And, as you know, Veeva Systems provides cloud software solutions for event management.
Veeva Systems also reported that it completed its acquisition of Crossix Solutions, a company that offers a patient data and analytics platform. For more than 300 million patients, Crossix Solutions’ platform connects health and non-health data, including clinical, claims, hospital, prescription (Rx and over the counter) and media data.
Clearly, it has a lot to offer, and that’s reflected in the company’s Portfolio Grader Report Card.
Its sales growth, operating margin growth and earnings growth are excellent. So, its Fundamental Grade is a B. And the stock is also seeing strong buying pressure, earning the company an A for its Quantitative Grade. So, VEEV’s Total Grade is an A, making the stock an excellent buy right now.
But VEEV isn’t the only A-rated stock with a double-digit return on my Buy List right now. I also have stocks holding double-digit returns which earn an A in Portfolio Grader and Dividend Grader, making them special AA-rated stocks.
These are the company with strong buying pressure and great fundamentals, but they also pay great yields – and have the strong business model to back it up!
I call these stocks “bulletproof.” These stocks are poised to do well – no matter where the market turns next.