We recently The 10 Best Health Insurance Stocks to BuyIn this article, we’ll look at how CVS Health Corporation (NYSE:CVS) stands relative to other health insurance stocks.
Healthcare market: what does the future hold?
2023 posed significant challenges for the healthcare sector as investors adjusted their portfolios to adapt to the high interest rate environment. This caused the sector to underperform compared to other segments of the stock market, especially technology and communication services. The turbulent environment has understandably created anxiety and pessimism about the future. According to Deloitte’s annual Healthcare Outlook survey, only 3% of health system executives and 7% of health plan executives said their outlook for 2024 was “positive,” down from 15% and 40%, respectively, marking a significant decrease from the previous year.
On the bright side, the aging baby boomer generation, which accounts for 20% of the U.S. population, is driving the growing demand for healthcare services and products, such as insurance, medicines, medical equipment, and hospital care. Forecasts indicate that healthcare costs will increase significantly over the next decade. In the U.S., the Centers for Medicare and Medicaid Services projects that national healthcare spending will increase 5.6% annually between 2023 and 2032. Similarly, in OECD countries, healthcare spending as a percentage of GDP is expected to increase from 8.8% to 10.2% by 2030. In addition to the aging population, a growing middle class in emerging markets will also contribute to the growing demand for healthcare services.
One of the biggest stories this year has been the rise of GLP-1 drugs as weight loss treatments, which has helped major developers Eli Lilly and Company and Novo Nordisk (NVO) significantly outperform their peers. Meanwhile, after vaccine and therapeutics sales approached $100 billion in 2022, many companies experienced a deep downturn due to declining post-COVID revenues, making year-over-year comparisons difficult. On the other hand, BlackRock predicts that the Healthcare sector will have the highest 12-month forward profit growth of all sectors year-over-year, with sales growth coming in behind only Consumer Goods and Information Technology.
Current state of health insurance
Health insurance remains a major issue, especially in the United States. In 2022, more than 300 million Americans, about 92% of the population, had health insurance. The U.S. healthcare system is a mix of public and private insurers, with private insurance being the predominant form of insurance. In the same year, more than half of the insured had private insurance through their employers, and about 36% were enrolled in public insurance programs such as Medicare or Medicaid.
As of 2023, the U.S. health insurance exchanges, established under the Affordable Care Act in 2014, are celebrating their 10th year of operation. Over the past decade, the individual market has experienced annual fluctuations in insurer participation, pricing, and plan options, making it interesting to say the least. According to McKinsey, consumer engagement is expected to increase significantly by 25% from 2020 to 2022, reaching approximately 16 million participants, coinciding with enhanced subsidies introduced in the American Rescue Plan Act of 2021.
The global health insurance industry is expected to experience significant growth in the coming years. According to one 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 company, car and family healthy life concept. Insurance agent presents a toy that symbolizes the coverage.
Our Methodology
To create a 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 are most widely held by hedge funds. The following companies, ranked by the number of hedge funds that own their stocks, provide health insurance services in the United States and/or internationally. Why care about what hedge funds do? The reason is simple: our research shows that you can outperform the market by mimicking the top holdings of the best hedge funds. Our quarterly newsletter strategy selects 14 small and large stocks every quarter, which have returned 275% since May 2014 and outperformed the benchmark by 150 percentage points (more here).
Rows of shelves in a retail pharmacy, displaying a variety of pharmaceutical and over-the-counter drugs.
CVS Health Corporation (NYSE:CVS)
Number of hedge fund holders: 54
CVS Health Corporation (NYSE:CVS) is a US-based healthcare company that controls an extensive network of retail pharmacies and clinics across the U.S. The company manages a range of brands, including retail pharmacy chain CVS Pharmacy, pharmacy benefits management company CVS Caremark, and health insurance provider Aetna.
In early May, Argus lowered its price target on CVS Health Corporation (NYSE:CVS) to $80 from $100 while maintaining a buy recommendation. The adjustment came after CVS Health’s first-quarter 2024 earnings fell short of market expectations and the company lowered its guidance. The new earnings per share forecast for 2024 is set at “at least $7.00,” down from “at least $8.30” predicted in February and “at least $8.50” projected in a December investor briefing.
The company has seen better-than-expected usage from Medicare Advantage plans, which it offers through its Healthcare Benefits division. As a result, CVS now expects adjusted operating income of at least $14.75 billion in 2024, down from the $16.9 billion estimate it provided in February and the $17.24 billion it initially forecast in December.
Additionally, on May 23, shares of CVS Health Corporation (NYSE:CVS) fell as much as 3% following unconfirmed reports that the company is exploring a partnership with private equity (PE) to expand its Oak Street Health platform. According to the report, CVS Health Corporation (NYSE:CVS) may pursue a similar partnership with Humana with Welsh-Carson, where CVS would initially take a minority stake in new clinics with the option to buy them out once they are established. However, analysts and RBC Capital Markets believe that Oak Street clinics will break even in the third or fourth year and mature by the sixth year, reaching $6-7 million in clinic-level profits, protecting CVS from losses during the clinics’ initial launch.
In its first quarter 2024 investor letter, Ariel Global Fund said the following about CVS Health Corporation (NYSE: CVS):
“We bought an American healthcare company. CVS Health Corporation (NYSE:CVS) acquired CVS following recent concerns about new legislation that could affect pharmacy benefit managers (PBMs), the middlemen who negotiate drug prices between insurers and pharmacies, as well as pricing issues for Medicare Advantage plans, a type of health insurance for seniors. The company’s lowered outlook for 2024 makes the stock an attractive entry point. Investor concerns about the new legislation appear to have eased, while Medicare Advantage plan usage has also stabilized. The CVS acquisition reflects our efforts to capitalize on temporary setbacks and position the company to be poised for a recovery.
Overall CVS No.8 Check out our list of the best health insurance stocks to buy. The 10 Best Health Insurance Stocks to Buy Let’s take a look at other health insurance stocks that hedge funds are watching. While we see potential in CVS, we believe AI stocks have a better chance of delivering higher returns in a shorter time frame. If you’re looking for AI stocks with better prospects than CVS but trading at less than 5x stock price, check out our report. Cheapest AI Stocks.
Read next: Analyst sees $25 billion in new ‘opportunity’ for NVIDIA and Jim Cramer’s 10 stock recommendations for June.
Disclosures: None. This article was originally published on Insider Monkey.
