We recently compiled a list of the 12 Cheap Healthcare Stocks to Buy Heading into 2025. In this article, we are going to take a look at where Centene Corporation (NYSE:CNC) stands against the other cheap healthcare stocks.

The Resilience and Challenges of Global Healthcare Spending

Investing in healthcare equities is typically seen as protective during recessionary times. This is because, even in hard financial times, consumers usually do not reduce their usage of prescription drugs or other necessary healthcare services. National healthcare spending is expected to reach an estimated $4.8 trillion in 2023 and increase at a 5.6% annual pace between 2027 and 2032, according to the Centers for Medicare and Medicaid Services (CMS).

According to a World Health Organization report published in December 2023, worldwide healthcare spending reached a record high in 2021 at $9.8 trillion, or 10.3% of global GDP. Except in low-income countries, where government health spending declined as a result of their significant reliance on foreign aid, public health spending increased globally. While 11% of the world’s population lived in countries where yearly healthcare spending was less than $50 per person, high-income countries paid about $4,000 per capita in 2021. Additionally, low-income countries accounted for just 0.24% of global health spending, despite having 8% of the world’s population. The study claims that although public health spending rose dramatically during the peak of the COVID-19 epidemic, this increase is unlikely to last in the long term as countries now place a higher priority on economic problems such as high inflation, decreasing GDP, and mounting debt servicing. According to Dr. Bruce Aylward, WHO Assistant Director-General for Universal Health Coverage, Life Course:

“Sustained public financing on health is urgently needed to progress towards universal health coverage. It is especially critical at this time when the world is confronted by the climate crisis, conflicts, and other complex emergencies. People’s health and well-being need to be protected by resilient health systems that can also withstand these shocks.”

The impending collapse of the U.S. healthcare system, especially in terms of staff shortages and financial instability, is the most worrisome aspect of the healthcare sector. There is a serious manpower shortage in the healthcare sector. An additional 124,000 doctors are expected to be required by 2030, and by 2027, 800,000 registered nurses (RNs) are expected to retire. A startling 24% of staff registered nurses are currently leaving their jobs. In certain healthcare systems, this deficit has resulted in the shutdown of critical patient services like obstetrics, pediatrics, psychiatry, and intensive care units.

Nevertheless, the U.S. spends over twice as much on healthcare as the OECD average, despite these difficulties, and the average results are poorer. This discrepancy emphasizes how ineffective and unsustainable the current system is. Further taxing the revenue cycle and reducing the amount of money available for therapeutic treatments is the fact that 58% of hospital bad debt originates from insured patients. The future of the American healthcare system appears bleak when these elements are taken together. The industry faces a systemic collapse that could have serious repercussions for the economy and public health if substantial intervention and reform are not implemented.

Our Methodology 

Our methodology involved selecting stocks with a market capitalization exceeding $10 billion and a price-to-earnings (P/E) ratio below 17. We then ranked these stocks based on their P/E ratios, as of December 22.

Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Centene Corporation (NYSE:CNC)

P/E Ratio: 10.29 

Centene Corporation (NYSE:CNC) is a multinational healthcare company specializing in health insurance and managed care services for government-sponsored programs like Medicaid, Medicare, and the Health Insurance Marketplace. It offers services such as managed care plans, pharmacy benefits management, telehealth, dental benefits, care management software, and home-based care. The company primarily serves state governments, individuals, families, employer groups, correctional facilities, and commercial organizations.

The Q3 results of Centene Corporation (NYSE:CNC) showed strong advancements in Medicaid stabilization, Medicare Star rating enhancement, and marketplace expansion. Additionally, the business is still on course to meet its annual objectives while setting itself up for long-term success. With an adjusted EPS of $1.62, the company’s Q3 2024 results are above forecasts thanks to advantageous tax timing. As redeterminations came to an end, the number of Medicaid members steadied at 13 million, with 30% of disenrolled people returning, despite short-term difficulties brought on by gaps. For investors looking at cheap healthcare stocks with solid growth potential, Centene Corporation (NYSE:CNC) offers a compelling choice. The second half of the year is expected to see rate increases of 4.5% to 5%, with the Medicaid Health Benefits Ratio (HBR) standing at 93.1%.

The percentage of participants in 2025 with a Medicare Star Rating of 3.5 or higher increased from 23% to 46%. In 2025, Medicare Advantage revenue is projected to be between $14 and $16 billion. With consistent margins anticipated, marketplace membership increased 22% year over year to 4.5 million. The corporation’s operational initiatives, such as AI for provider contracts, helped generate $36.9 billion in revenue in the third quarter. Lastly, Centene (NYSE:CNC) bought back $1.6 billion worth of shares despite the cash flow impacts of rate hikes.

Regarding Centene Corporation (NYSE:CNC), Oakmark Select Fund wrote the following in its investor letter for Q2 2024:

“Centene Corporation (NYSE:CNC) is one of the largest health insurers in the U.S. The company specializes in three major government-sponsored programs: Medicaid, Marketplace, and Medicare Advantage, each of which benefits from long-term secular tailwinds. In Medicaid, states are steadily outsourcing their programs to companies like Centene to reduce costs and improve care quality. Managed Medicaid penetration has increased throughout the past decade and we expect further gains over time. In Marketplace, growth is driven by the trend toward more individuals buying health insurance. Centene holds the #1 market share in both of these programs and is well-positioned to capitalize on their continued growth. Finally, we believe management is successfully turning around Centene’s Medicare business and expect the division to generate positive earnings over time. After adjusting for losses stemming from Centene’s Medicare business, we were able to purchase shares at a single-digit P/E multiple, which we think is too cheap for a leading, secularly growing Medicaid company and an improving Medicare business.”

Overall CNC ranks 1st on our list of the cheap healthcare stocks to buy heading into 2025. While we acknowledge the potential of CNC as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CNC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.