Below we present the list of 5 Best Health Insurance Stocks to Buy. For our methodology and a more comprehensive list please see 11 Best Health Insurance Stocks to Buy.
5. Humana Inc. (NYSE:HUM)
Number of Hedge Fund Shareholders: 68
Landing at number five among the 11 best health insurance stocks to buy is Humana Inc. (NYSE:HUM), which steadily rose in popularity among hedge funds throughout 2021 and most of 2022 before sliding back somewhat in the final quarter of last year. Rajiv Jain’s GQG Partners and Jeffrey Smith’s Starboard Value own two of the most prominent HUM positions among hedge funds as of March 31.
Humana Inc. (NYSE:HUM) is the fifth-biggest medical insurer in the world with more than 22 million members and appears poised for strong growth over the next half-a-decade, with analysts predicting the company’s adjusted diluted EPS will rise by 14.3% annually during that time. Deutsche Bank recently raised its price target on HUM to $568 from $562 while retaining a ‘Buy’ rating on the stock, noting that Humana’s acquisitions last year have helped stabilize the company.
Renaissance Investment expects an acceleration in Humana Inc. (NYSE:HUM) Medicare membership growth, as the firm discussed in its Q3 2022 investor letter:
“In September, we added a new position in the Health Care sector with Humana Inc. (NYSE:HUM), one of the largest managed care providers in the U.S. with a focus on medical insurance for the Medicare Advantage market. We believe Humana is poised to see a reacceleration in Medicare Advantage membership growth after making large investments in its program benefits earlier this year. In addition, we like the demographic tailwinds for the entire Medicare Advantage market, as the next four years should provide the highest number of baby boomers yet qualifying for Medicare benefits.”
4. CVS Health Corporation (NYSE:CVS)
Number of Hedge Fund Shareholders: 77
There was an 11% rise in hedge fund ownership of CVS Health Corporation (NYSE:CVS) during Q1, giving the stock more smart money shareholders than it’s ever had save for the fourth quarter of 2018, when ownership briefly spiked by more than 50% before several funds sold off their shares again the following quarter. Several quant funds are major shareholders of CVS, including Two Sigma Advisors, Renaissance Technologies, and AQR Capital Management.
CVS Health Corporation (NYSE:CVS) shares are down around 52-week lows in the wake of the company losing out on a $35 billion pharmacy benefits management contract for 2024, which the company expects will result in a $2 billion impact next year. On the positive side of the ledger, CVS’ insurance business Aetna grew revenue by 12% year-over-year in Q1. The recent share slump has also made CVS’ dividend, one of the best in the industry, quite a bit more attractive, as shares now yield 3.39%.
Greenlight Capital got burned on CVS Health Corporation (NYSE:CVS)’s acquisition of Oak Street Health, despite trying to talk the former company out of the deal according to the fund’s Q1 2023 investor letter:
“Second, we will discuss Oak Street Health (OSH), which we closed out after costing us 0.8% (net) during the quarter. CVS Health Corporation (NYSE:CVS) is buying OSH for $39 per share, or about $10 billion. When shorting, there is always the risk that someone with deep pockets will buy out the company at a silly price, or maybe even at twice a silly price. CVS is worth $115 billion (or it was the day they announced the deal; subsequently, CVS’s shares have fallen and it’s now worth $93 billion), so it can afford to piss away $10 billion.
OSH is in value-based care, which has become a trendy segment of the market. Most of the “value” comes from doing a more thorough and aggressive job of documenting how sick a patient is, so as to maximize Medicare payments. OSH operates 169 clinics (costing between $1.5-$2 million to build) in mostly lower income neighborhoods and employs 600 doctors. CVS projects that in 2026 the pro forma entity will have 300 clinics and “embedded EBITDA” of $2 billion, plus over $500 million of synergies.
In 2022, OSH generated less than $1 million of adjusted revenue per doctor2 and lost $500 million (almost $3 million per clinic). Even if it triples the number of doctors by 2026, it will need over $1 million of “embedded EBITDA” per doctor, implying margins shifting from a loss to nearly 100%. Obviously, this can’t happen, as the doctors need to be paid and there are other substantial costs. The amazing thing is that when rumors of this deal circulated, we reached out to CVS management and had a call where we walked them through the math… and they went ahead with the deal anyway. When the proxy came out, it revealed that OSH conducted an auction and, like a late-night eBay shopper who had one too many glasses of wine, CVS raised its uncontested bid several times… Rant over.”
3. The Cigna Group (NYSE:CI)
Number of Hedge Fund Shareholders: 79
Hedge fund ownership of The Cigna Group (NYSE:CI) is up by 43% over the last five quarters, including hitting an all-time high in the first quarter of 2023. Michael Burry’s Scion Asset Management was one of the most prominent fund managers to take a stake in CI during Q1, buying 25,000 shares. The iconic money manager, who’s famed for his bet against bonds and the housing market during the financial crisis, as portrayed in ‘The Big Short’, now has just under 6% 13F exposure to Cigna.
The Cigna Group (NYSE:CI) is one of the five biggest health insurers in the world, with just over 178 million customer relationships at the end of 2022, up by 2.2% year-over-year. Shareholders’ net income per share rose to $4.24 in Q1, up from $3.73 a year earlier and analysts predict that Cigna will be able to continue growing its adjusted diluted EPS by more than 11% per year over the next five years, only slightly lower than the industry’s expected earnings growth.
The Artisan Value Fund debated some of the reasons The Cigna Group (NYSE:CI) may have sold off during the first quarter in the fund’s Q1 2023 investor letter:
“The Cigna Group (NYSE:CI) delivered strong operating results that came in well ahead of the company’s initial guidance, yet the stock has continued to sell off since the beginning of 2023. It seems there are a few reasons for it: 1) concerns over the government targeting pharmacy benefit managers and trying to directly negotiate drug prices under the president’s new budget, 2) a potential normalization of elective procedures that increases medical costs, 3) a rotation by dedicated health care investors toward medical technology and technology areas and away from the safety of big pharma and HMOs, 4) disenrollment trends as it relates to the commercial book of business heading into a potential downturn, and 5) selling in the space as we approach another presidential election in 2024. Pick your poison, but the selling has taken the stock price back to its levels of mid-2022. Our investment case hasn’t changed. Cigna is one of the few managed care organizations in the US with the scale and size to compete effectively. In 2022, free cash flow was $7.4 billion, up $1.3 billion from 2021. Cigna paid down $3.5 billion of debt, repurchased $7.6 billion in stock and sold its life, accident and supplemental benefits business in Asia to Chubb that helped fund the share repurchases. In short, the business in performing well, and management is smartly allocating capital. Additionally, the stock is selling for less than 11X next year’s earnings, which is inexpensive.”
2. Elevance Health, Inc. (NYSE:ELV)
Number of Hedge Fund Shareholders: 81
Hedge funds have also been pouring into long positions in Elevance Health, Inc. (NYSE:ELV) in recent quarters, with the stock also very close to an all-time high in smart money ownership. Andreas Halvorsen’s Viking Global has the largest stake in ELV among the select group of funds tracked by Insider Monkey’s hedge fund database, owning over 2.15 million shares worth nearly $1 billion.
Elevance Health, Inc. (NYSE:ELV), formerly Anthem, is one of the biggest players in the health insurance industry, boasting 47.5 million members at the end of 2022, a 5% year-over-year increase. Despite that customer growth, the company’s GAAP net income of $6.03 billion was down slightly from the prior year, though analysts are predicting a big push on that front in 2023, predicting GAAP net income per share to rise by as much as 35%.
The Baron Health Care Fund is bullish on Elevance Health, Inc. (NYSE:ELV)’s growth opportunity, as it revealed in its Q1 2023 investor letter:
“Elevance Health, Inc. (NYSE:ELV) is a leading health benefits company in the U.S., serving more than 45 million members through its affiliated health plans under the Blue Cross/Blue Shield brand in 14 states. Shares fell along with those of other managed care companies on investor concerns over proposed lower 2024 Medicare Advantage (MA) rates and changes in risk assessment methodology. We believe Elevance has multiple growth drivers, including its MA business, its in-house pharmacy benefit management business, and its Diversified Business Group, which includes behavioral health, advanced analytics, and complex and chronic care services. Near term, medical cost trends remain low, Elevance has pricing power, and earnings should benefit from rising interest rates. Over the long term, management targets 12% to 15% annual EPS growth. We think Elevance is a high-quality growth company trading at a reasonable valuation.”
1. UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Shareholders: 116
Easily topping the list of the best health insurance stocks to buy is UnitedHealth Group Incorporated (NYSE:UNH), which hit an all-time high in hedge fund ownership during Q1 and ranks as one of the top 15 stocks among hedge funds as of March 31. Rajiv Jain’s GQG Partners, Andreas Halvorsen’s Viking Global, and Boykin Curry’s Eagle Capital Management all have substantial positions in UNH and greater than 4% 13F exposure to the stock.
UnitedHealth Group Incorporated (NYSE:UNH), which serves more than 150 million customers, has more than tripled its revenue over the past decade to just over $324 billion last year. And despite being the biggest player in the industry, analysts project UnitedHealth to grow earnings at a higher rate than its peers over the next five years. That UNH shares are trading fairly close to their 52-week lows makes this a great opportunity to grab a premium name in the health insurance space at a discount.
The Alger Spectra Fund believes UnitedHealth Group Incorporated (NYSE:UNH)’s fundamentals and growth outlook remain solid despite some short-term market trepidation towards the stock, as the fund discussed in its Q1 2023 investor letter:
“UnitedHealth Group Incorporated (NYSE:UNH) is an integrated healthcare benefits company uniquely positioned to address rising healthcare costs for its customers, due to its vertical integration, size, and scale. The Optum health benefits services unit, which accounts for approximately 45% of the company’s operating earnings, in our view, has the potential to grow even further as customers look for ways to manage rising healthcare costs. During the period, shares detracted from performance due to several factors: 1) many 2022 healthcare winners with shorter duration profiles and persistent earnings profiles, such as UnitedHealth Group. underperformed in the first quarter of 2023, 2) uncertainty surrounding Medicare Advantage reimbursement levels from the Federal government in 2023, which will be determined later in the year, and 3) increased regulatory scrutiny in the form of potential Medicare Advantage audits across the industry. While these concerns have impacted UnitedHealth in the near-term, we believe company fundamentals remain intact given its large scale business model, competitive advantages, and medium to long-term growth prospects.”
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