Fall brings pumpkin spice lattes, cooler temperatures, football — and open enrollment for health insurance. While temperatures drop, scrutiny of health insurance plans rises, and it’s a good time to take stock of your sweater wardrobe and your portfolio, especially which healthcare companies you invest in.
Sure, the stock market is having a banner year. But healthcare stocks? Not so much. The healthcare sector is up just 2% in 2019. (Only one of the 11 Standard & Poor’s sectors has fared worse this year.) So if you’re especially risk-averse, you may want to stay away from the sector altogether. But if you choose to participate, there are some exciting stocks to consider.
Healthy third quarters for Anthem and Cigna
Anthem’s third-quarter revenue went up 14.7% to $26.7 billion from $23.3 billion in the same quarter of 2018. Profits rose 23%, a healthy result for the Blue Cross-Blue Shield insurer. Its quarterly earnings of $4.84 rose from $3.81 a year ago. What was behind Anthem’s good showing? Membership growth, higher premiums, and growth in ancillary businesses.
Anthem covers about 41 million people, primarily via employer-sponsored health plans. (It does cover about 1.2 million people via Medicare and another 7.3 million through Medicaid.)
Cigna shared good third-quarter results, too. The health insurance giant reported earnings per share of $4.54, compared to $3.84 in the third quarter of 2018, exceeding analysts’ expectations.
Cigna covers fewer people than Anthem — 3.6 million in the U.S. and 8 million in 29 other countries. Its non-U.S. business, Cigna International, provides specialized health products to employees of multinational companies based abroad. That business may provide some cover from the vagaries of the U.S. healthcare market. (In July 2015, Cigna was supposed to merge with Anthem. But the U.S. Department of Justice blocked the move in 2017.)
The companies have very similar price-to-earnings growth (PEG) ratios: Anthem’s PEG is 0.77 and Cigna’s PEG is 0.73. The insurers’ price-to-earnings (P/E) ratios may offer a clearer picture of their potential. Anthem’s P/E ratio is 12.36, while Cigna’s is 9.96. Investors looking for growth could choose Anthem; investors looking for value may go with Cigna.
Sunny near-term outlook
Cigna’s stock had seen some pressure because of worries over political risks. Before it reported results, its shares were down 7.1% for the year. It hit a low for the year Aug. 27, closing at $146.27. But it was up to $178.46 at close Oct. 31 when it reported earnings, and it has continued a climb, moving to $183.13 by Nov. 6.
Expect the health services segment to contribute a great deal more to Cigna’s top and bottom lines in the fourth quarter and into the year ahead. In 2020, Cigna expects its pharmacy services business to regain 97% of current customers, and to process between 25 million and 35 million more scripts.
For the full year, Anthem expects generally accepted account principles (GAAP) net income to exceed $18.45 per share, up from its previous guidance of $18.34 a share. The company also projects adjusted net income will be greater than $19.40. (Anthem’s previous guidance called for full-year adjusted net income of greater than $19.30 per share.)
Anthem CEO Gail Boudreaux said the company’s third-quarter growth in membership and operating revenue gives it “great momentum as we head into 2020.”
Cloudy long-term outlook
And looking at another piece of the puzzle, the 2020 presidential election, many investors are concerned about the growing popularity of Elizabeth Warren’s candidacy. On Nov. 1, Senator Warren announced the details of her “Medicare for All” plan, which would eliminate private health insurance and replace it with free government health coverage for all Americans.
A single, generous public plan like the one Senator Warren and other Democratic candidates are proposing would replace private insurance from companies like Anthem and Cigna. That would undoubtedly lead to a reshaping of the nation’s health-care system.
So while Cigna and Anthem may be a good bet for short-term gains, the uncertainty of the 2020 election may affect their value for the long-term investor. It could be a good time to look at diversifying your portfolio for the longer term, moving away from health insurance stocks until the future becomes more clear.