We recently compiled a list of the 10 Best Health Insurance Stocks to Buy. In this article, we are going to take a look at where Humana Inc. (NYSE:HUM) stands against the other health insurance stocks.
The Healthcare Market: What does the future hold?
2023 posed significant challenges for the healthcare sector as investors adjusted their portfolios to adapt to a higher interest rate environment. This led to the sector underperforming compared to other segments of the equity market, particularly technology and communication services. The disruptive environment has understandably created some anxiety and pessimism about the future. Deloitte’s annual Health Care Outlook Survey reveals that only 3% of health system executives and 7% of health plan executives have a “positive” outlook for 2024, down from 15% and 40%, respectively, marking a significant year-over-year decline.
On the brighter side, the aging baby boomer generation, which constitutes 20% of the U.S. population, is driving a growing demand for healthcare services and products such as insurance, pharmaceuticals, medical devices, and hospital care. Projections indicate a notable increase in healthcare spending over the next decade. In the U.S., the Centers for Medicare & Medicaid Services forecasts a 5.6% annual growth in national health expenditure between 2023 and 2032. Similarly, in OECD countries, healthcare spending as a percentage of GDP is expected to rise from 8.8% to 10.2% by 2030. Alongside aging populations, the expanding middle class in emerging markets will also contribute to heightened demand for healthcare services.
One of the biggest news stories of the year was the rise of GLP-1 drugs as weight loss treatments, leading to significant outperformance by leading developers Eli Lilly & Company and Novo Nordisk (NVO) compared to their peers. Conversely, many companies experienced a severe downturn due to the post-COVID revenue drop, after vaccine and therapeutic sales neared $100 billion in 2022, resulting in challenging year-over-year comparisons. On another front, BlackRock, Inc. projects that the healthcare sector will have the highest 12-month forward earnings growth across all sectors on a year-on-year basis, with sales growth trailing only the consumer discretionary and information technology sectors.
The State of Health Insurance
Health insurance remains a prominent issue, especially in the United States. In 2022, over 300 million Americans, approximately 92% of the population, had health insurance. While the U.S. healthcare system features a blend of public and private insurers, private insurance comes out on top as the predominant form of coverage. That same year, more than half of insured individuals received private insurance through their employer, while approximately 36% were covered by public insurance programs like Medicare and Medicaid.
As of 2023, the US health insurance exchanges, created under the Affordable Care Act in 2014, market their tenth year of operation. Throughout this decade, the individual market has remained interesting, to say the least, having experienced annual fluctuations in insurer participation, pricing, and plan options. According to McKinsey, consumer engagement significantly increased by 25% from 2020 to 2022, reaching approximately 16 million participants, thus aligning with the enhanced subsidies introduced by the American Rescue Plan Act of 2021.
The global health insurance industry is poised for substantial growth in the coming years. According to a report, the global health insurance market is projected to achieve a Compound Annual Growth Rate (CAGR) of 9.9% from 2022 to 2030, reaching a market value of $5.28 trillion by 2030.
Insurance house, car and family health live concept. The insurance agent presents the toys that symbolize the coverage.
Our Methodology
To compile our list of the best health insurance stocks to buy, we sifted through multiple ETFs and internet rankings. We then analyzed Insider Monkey’s Q1 2024 database to select the stocks that were the most widely held by hedge funds. The following companies, ranked by the number of hedge funds holding their shares, provide health insurance services within the United States and/or internationally. Why do we care about what hedge funds do? 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).
A closeup of an elderly patient happily receiving a specialty healthcare product.
Humana Inc. (NYSE:HUM)
Number of Hedge Fund Holders: 74
Humana Inc. (NYSE:HUM) is dedicated to enhancing health and well-being by providing healthcare benefits to its medical and specialty members. Its extensive range of services includes fully-insured medical and specialty health insurance benefits such as vision, dental, and supplemental health benefits, along with administrative services only (ASO) products for individuals and employer groups. Additionally, the company offers healthcare services tailored to retired and active duty military personnel and their dependents.
Cantor Fitzgerald recently adjusted its price target for Humana Inc. (NYSE:HUM) to $360 from the previous target of $391 set in April, while maintaining a Neutral rating on the stock. This revision follows Humana’s first-quarter earnings report, which surpassed expected financial metrics. Humana reported an EPS of $7.23 for Q1 2024, exceeding the FactSet consensus of $6.12. The company’s revenue reached $29.6 billion, surpassing the expected $28.5 billion. Humana Inc. (NYSE:HUM)’s medical loss ratio (MLR), a critical measure of the amount spent on medical claims relative to the insurance premiums collected, was 89.3%, slightly higher than the consensus of 88.9%.
Despite these positive results, there are concerns about the lack of clarity regarding the company’s outlook for 2025 and the degree of conservatism in its reserve assumptions. Cantor Fitzgerald analysts pointed out that although Humana Inc. (NYSE:HUM) has maintained its full-year MLR at 90% and its EPS forecast at approximately $16, there remains some uncertainty about the new guidance for 2025.
According to Insider Monkey, 30 out of the 919 hedge funds tracked reported owning stock in Humana Inc. (NYSE:HUM) as of Q1 2024. Among the top hedge fund investors in the company, Citadel Asset Management held a notable stake valued at over $372.4 million.
Diamond Hill Large Cap Strategy stated the following regarding Humana Inc. (NYSE:HUM) in its first quarter 2024 investor letter:
“Among our bottom Q1 contributors were real estate investment trusts (REITs) Extra Space Storage and SBA Communications, as well as Humana Inc. (NYSE:HUM). Shares of health insurance company Humana were meaningfully pressured in late 2023 against a backdrop of accelerating medical costs among its Medicare population, weighing on health plan profitability. Further, since Medicare Advantage plan pricing is set in June of each year for the following year, Humana is unable to offset increased medical costs with higher pricing — which in turn pressured shares in Q1. Nevertheless, we anticipate Humana will be able to improve margins over the next several years and maintain our conviction in our position.”
Overall HUM ranks 4th on our list of the best health insurance stocks to buy. You can visit 10 Best Health Insurance Stocks to Buy to see the other health insurance stocks that are on hedge funds’ radar. While we acknowledge the potential of HUM 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 HUM 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.