In this article we will be taking a look at top 5 stock picks of Jose Fernandez’s Stepstone Group. To read our detailed analysis, you can go directly to see Top 10 Stock Picks of Jose Fernandez’s Stepstone Group.
5. Bright Health Group, Inc. (NYSE:BHG)
Stepstone’s Stake Value: $80.453 million
Number of Hedge Fund Holders: 11
Bright Health Group, Inc. (NYSE:BHG) is an American health insurance company. Founded in 2016, Bright Health Group, Inc. (NYSE:BHG) currently serves more than 1.1 million customers across the United States. In Q1 2022, 11 hedge funds reported long positions in the company, with combined stakes exceeding $92 million.
Nomadic Value Partners, which is an investment management firm, mentioned Bright Health Group, Inc. (NYSE:BHG) in its Q3 2021 investor letter. Here is what it said:
“In the first week of August, we made a farm team investment in Bright Health Group (BHG), a health insurer with a similar payer/provider integration strategy as United Health. On September 30th we upsized our position to a 5% weighting. Our averaged cost basis of $8.16 per share creates the company at a valuation slightly over 1x 2021’s expected sales. This valuation may be appropriate for a low growth, old world health insurer, but it is too low in my view after adjusting for the company’s position in the market, various lines of business, and its expected sales growth over the next few years.
To understand why BHG trades at a low valuation today, let’s look at the history and current state of the core market it competes in.
In 2014, as a major program of the Affordable Care Act (ACA), healthcare.gov and numerous state-led sites were launched to create a marketplace for individuals and family insurance plans (IFPs). The idea was to offer affordable insurance to the working age population that didn’t have access to employer-sponsored or Medicaid coverage. Unfortunately, healthcare.gov was doomed from the start. Partisan politics and website glitches were large drivers for both generating unaffordable plans and disincentivizing brokers from directing consumers to the exchanges. By 2018, there had been a mass exodus. Total patients decreased from 12.7 million to 11.8 million, and total Qualified Health Plan (QHPs) offerings decreased from 252 to 132. Many counties across the country were left with less than 3 insurers, and over 30% of counties were left with only 1 insurer offering plans. Average monthly premiums also doubled over this period.
Despite the marketplace’s de-emphasis and decline, it was still very large at around $50 billion in premiums in 2018. This was a major opportunity for a health plan with the tools and skills to profitably offer plans to underserved patients. Bob Sheehy, ex UNH CEO, founded BHG in 2016 with this in mind. BHG also attracted a respectable early-stage venture investor, Bessemer Venture Partners, who provided the capital and patience to build a health insurer from scratch. The distilled thesis laid out in Bessemer’s 2017 Series A investment memo was, “the investment thesis here is simple – huge market, great team, and a strong initial health plan product with many expansion opportunities.”
