Health Net (HNT): Affordable Health Act growth driver

By Timothy Lutts, Chief Analyst, Cabot Stock of the Month
From Cabot Wealth Advisory 9/22/14 Sign up for Cabot Wealth Advisory—it’s free!

Today’s stock pick is Health Net (HNT), a company that provides managed health care services through both private and government-sponsored plans.

I’m including the write-up of HNT that appeared in the September 8 issue of Cabot Top Ten Trader, our advisory that’s emailed every Monday that summarizes the 10 strongest stocks of the previous week (but only if the stock trades in double digits, has sufficient trading volume and positive momentum). Top Ten recommendations give you a wealth of technical information, fundamental numbers and chart analysis, giving subscribers a complete analysis of why a stock is strong on just one page.

Why the Strength

California-based Health Net administers health benefits to about 5.5 million people across the U.S., primarily through group, individual, Medicare, Medicaid, DoD, TRICARE and Veterans Affairs programs. The company gets nearly 95% of its revenue from health plan premiums, and investors see the Affordable Care Act as a powerful driver of growth in this industry. The company experienced uncharacteristically weak earnings in 2012, earning just 31 cents per share. But they rebound to $2.12 per share in 2013 signaled a return to normal. Interest in Health Net got a boost on May 7 as the company’s slightly disappointing quarterly numbers were accompanied by very strong guidance on future results. The company’s August 6 quarterly report featured a nice beat on revenues and guidance that was in line with expectations. The latest good news for the company was the announcement on August 26 that it had received disease management reaccreditation from URAC, an independent, nonprofit accrediting organization. This reaccreditation is expected to contribute to Health Net’s marketing success. The company’s business looks healthy, and earnings should continue to grow nicely next year.

Technical Analysis

HNT blasted out of a long base in May after strong guidance rescued an otherwise disappointing quarterly report, jumping from 34 to 37 on monster volume. HNT put in five weeks rebasing at 40, then stepped up to 43 in July. The reaction to Q2 earnings was delayed, but ultimately produced a rally that began on August 8 and broke out to new highs in late August. From its high of 47 on the last trading day of August, HNT has corrected to 46 and is now holding above 46 as it consolidates its gains. HNT is a buy anywhere near 46, with a stop at its 50-day moving average, now at 43.5.

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