Outlook for Managed-Care Stocks Brightens Despite 2020 Risks
Outlook for Managed-Care Stocks Brightens Despite 2020 Risks
(Bloomberg) -- The outlook for managed-care stocks next year appears bright after a tumultuous 2019.
The rise and fall of Senator Elizabeth Warren in the polls for the 2020 presidential election wrecked havoc on the S&P 500 Managed Care index, which sank as much as 21% in a two-month stretch amid fears private insurers would be disrupted. The index, however, is ending the year with its largest-ever quarterly gain since Bloomberg started tracking the data in 1994. Not only has Warren’s rise in the polls lost momentum, her plans for Medicare for All have moderated.
“We’ll probably end up having a more moderate Democratic candidate nominated,” JPMorgan Chase analyst Gary Taylor said in a telephone interview. “You’ve got a status-quo incumbent president, potentially a moderate challenger: whoever wins doesn’t seem to be driving a lot of change.”
Taylor reversed his cautious stance on insurers last week, citing diminishing political risks. He also questioned whether a single-payer system, as proposed by some Democratic presidential candidates, could pass Congress given the bipartisan opposition to the proposal.
Goldman Sachs analyst Stephen Tanal shared the more optimistic view on insurer stocks next year, pointing out that steep pre-election sell-offs in the sector have historically been followed by outperformance.
For now, markets broadly see President Donald Trump as the likely winner of the 2020 presidential election, according to data compiled by the PredictIt option site. Former Vice President Joe Biden pulled ahead of Warren in the site’s Democratic nominee betting last month, followed by Senator Bernie Sanders.
“While the outcome of the 2020 election will matter for the stocks, the outcome of private insurance being banned carries low probability while other more moderate proposals do not represent substantial risk,” Tanal wrote last week.
Investors believe a second Trump term would be a continuation of the status quo, while Biden’s proposal represents more incremental changes to the Affordable Care Act, which includes creating a “public option.”
Still, other analysts are reminding investors that while political fears may be fading, they aren’t going away. Bloomberg Intelligence analyst Glen Losev cautioned that volatility may return next year as the presidential campaign heats up.
Here’s what analysts are anticipating for health insurers in 2020:
Goldman Sachs, Stephen Tanal
Health insurance stocks “can work” despite the policy uncertainty, analysts led by Tanal wrote in a note earlier this month. Goldman’s analysis of the past six election years, excluding 2008, found that the S&P Managed Care Index rose 29% in presidential election years on average, and outperformed the S&P 500 by 20% on average during the same period.
The bank sees a 79% chance that either Trump is re-elected or a Democrat, who doesn’t support eliminating private insurers, will win. The analysts pegged the probability of a Trump victory at 44%.
On stocks, they recommend “leaning into quality” and reiterated a buy rating on UnitedHealth Group Inc., Humana Inc and Cigna Corp.
JPMorgan Chase, Gary Taylor
Fears about the 2020 election cycle have been “accelerated into 2019,” therefore the outperformance will also be “accelerated into 2020,” Taylor wrote in a note last week.
Regarding Medicare for All proposals, “if most Democrats and all Republicans oppose, how can it ever pass?” Taylor also questioned if a public option would be able to pass the Senate without a 60-vote supermajority that “appears improbable even by 2022.” The most likely change appears to be an extension of Medicare that would allow Americans under 65 to buy coverage, which could expand the private Medicare Advantage market.
Overall, health insurers’ fundamentals are expected to keep up. Taylor sees a “Goldilocks” scenario in the market, in which a modest increase in patient use of medical care could benefit hospitals without hurting insurers, which are more geographically diversified.
JPMorgan recommended overweight-rated Humana, UnitedHealth and HCA Healthcare Inc. as its top picks in 2020.
Taylor sees managed-care outperforming its hospital peers and the broader market in the years ahead. However, the sector’s 665% rally over the past decade may be hard to replicate, he said.
Bank of America, Kevin Fischbeck
Fischbeck turned more bullish on hospitals recently, saying that the bank’s hospital surveys point to increased patient utilization this year. While that, coupled with a strong flu season, may boost facilities, it could pressure health insurers into the first quarter, he said.
“As a result, we think it’s prudent to enter 2020 with a modestly more positive view on the near term results for hospitals and modestly more cautious view on near term upside on MCOs,” he wrote.
BofA downgraded Anthem to neutral while boosting HCA to buy earlier this month.
What Bloomberg Intelligence Says
Health insurers should experience volatility in 2020, similar to the previous year, driven by the U.S. presidential race and what changes it may bring. Fundamentals should remain stable in 2020, in our view, but less robust relative to the previous year. Similar to 2019, medical-cost trends are projected to be manageable, with enrollment growth mainly fueled by Medicare. However, rate increases for 2020 (Medicare Advantage and Marketplace) will be below the previous year. The return of the health-insurance fee, while expected, will pressure earnings growth in 2020 and keep generalists on the sidelines.
--Glen Losev, BI health-care analyst
See Also
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