House Republicans introduced a bill on Monday to repeal Obamacare and replace it with their own plan. The ramifications of the proposed overhaul are far-reaching, especially for insurers, who would be allowed to charge higher premiums to people who let their coverage lapse and benefit from refundable tax credits granted to individuals who purchase health insurance. And that’s good news for health insurance stocks.
Shares of some of the largest health insurers spiked in early Tuesday trading on the news. By mid-day, the seven largest health insurance stocks by market cap were up on a day when the overall market was down slightly. Humana (HUM), the Louisville-based insurer that recently vowed to pull out of ObamaCare by year’s end, made the biggest Tuesday move, up more than 2%. Humana stock is now up nearly 9% in the last month.
There’s a long way and a whole lot of political squabbling to go before the proposed ObamaCare replacement bill can become a reality, which is partly why the initial reaction to the news among health insurance stocks was somewhat muted. The bigger spike for the health insurance sector came after the election, since tearing down ObamaCare was a big theme for Donald Trump on the campaign trail.
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In theory, most private insurers would benefit, to varying degrees, from a new health plan. But which health insurance stocks are best poised for a breakout should House Republicans get their way?
Humana probably has the best chart (see below), having soared from 165 to 216 in November alone. It also trades at just 18 times forward earnings estimates, with EPS expected to grow by 14% this year, which would match the company’s best annual bottom-line growth since 2011.
Aetna (AET) also looks good, having exploded from 105 to 134 after the election and climbing back to 131 this week after a big pullback in December and January. It’s also a value and growth stock at just 13 times forward earnings estimates, with analysts anticipating 7.5% growth this year.
Cigna (CI) kited from 117 to 140 after the election, and hasn’t experienced the same kind of extreme correction Aetna and Humana went through. It’s currently up to 153 and climbing, with a forward P/E of just 14 and expected 2017 EPS growth of 17%.
On average, the seven largest health insurance stocks have risen 22% since the election, exactly double the 11% return in the S&P 500 during that time. Though a few of them followed up big Novembers with steep drop-offs in December and January, every single one of them now trades above its 50-day moving average. And all seven are projected to grow earnings this year.
Bottom line: with or without Congressional overhaul of the Affordable Care Act, health insurance stocks have plenty of momentum right now. While Tuesday’s reform proposal could portend even bigger things to come for health insurers, in the meantime, there are plenty of good-looking opportunities in the sector.
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