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 CVS Health Corporation (NYSE:CVS) 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 row of shelves in a retail pharmacy, demonstrating the variety of drugs and over-the-counter products.
CVS Health Corporation (NYSE:CVS)
Number of Hedge Fund Holders: 54
CVS Health Corporation (NYSE:CVS) is a U.S.-based healthcare enterprise that manages an extensive network of retail pharmacies and clinics across the country. The corporation oversees various brands, including CVS Pharmacy, a retail pharmacy chain; CVS Caremark, a pharmacy benefits manager; and Aetna, a health insurance provider.
In early May, Argus revised its stock price target for CVS Health Corporation (NYSE:CVS), lowering it to $80 from the previous $100 while maintaining a Buy rating. This adjustment followed CVS Health’s first-quarter earnings for 2024, which fell short of market expectations and led the company to revise its guidance downward. The new earnings per share forecast for 2024 is set at “at least $7.00,” down from the “at least $8.30” projected in February and the “at least $8.50” anticipated during the Investor Day in December.
The company experienced higher-than-anticipated usage in the Medicare Advantage plans offered through its Health Care Benefits segment. As a result, CVS now projects its adjusted operating income for 2024 to be at least $14.75 billion, down from the $16.9 billion estimate provided in February and the initial $17.24 billion outlook from December.
Additionally, on May 23, CVS Health Corporation (NYSE:CVS) saw its shares decline by as much as 3% following an unconfirmed report that the company was seeking a private equity (PE) partnership to expand its Oak Street Health platform. According to the report, CVS Health Corporation (NYSE:CVS) may pursue a partnership similar to Humana’s with Welsh Carson, where CVS would initially take a minority interest in new clinics with an option to purchase once they are established. Analysts and RBC Capital Markets, however, believe that Oak Street clinics will reach break-even by year three or four and mature with $6-7 million in clinic-level profit by year six, protecting CVS from startup losses during the clinics’ early years.
Ariel Global Fund stated the following regarding CVS Health Corporation (NYSE:CVS) in its first quarter 2024 investor letter:
“We bought American healthcare company, CVS Health Corporation (NYSE:CVS), following recent concerns related to potential new laws affecting Pharmacy Benefit Managers (PBMs)—intermediaries that negotiate drug prices between insurers and pharmacies—and issues with pricing in its Medicare Advantage plans, a type of health insurance for senior citizens. Shares presented an attractive entry point after the company lowered its 2024 outlook. While investor apprehension regarding the new laws appears to have eased, utilization of Medicare Advantage plans is also stabilizing. Our purchase of CVS reflects our efforts to capitalize on temporary setbacks and secure positions in companies poised for a rebound.”
Overall CVS ranks 8th 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 CVS 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 CVS 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.