Five Health Care Investments to Buy for a Pandemic Recovery

Paul Dykewicz

[gold pill]

Five health care investments to buy for a COVID-19 pandemic recovery feature the nation’s largest for-profit hospital chain, a large managed care organization (MCO) and a manufacturer of medical and dental instruments.

The health care investments to purchase offer strong potential to profit from the economic reopening that will favor providers who should see improving trends as COVID-19 wanes and volumes rise on favorable year-over-year comparisons for the rest of 2021. The performance of hospital chains should improve starting in March amid cost controls and patients becoming increasingly comfortable seeking care for non-urgent conditions they may have delayed during the pandemic before the expanded rollout of COVID-19 vaccines.

Hospital stocks should outperform MCOs in 2021, particularly in the first half of 2021, with the top performer likely becoming Nashville, Tennessee-based HCA Healthcare (NYSE:HCA), the largest for-profit operator of health care facilities in America, according to BoA Global Research. Even though it is not always true that when hospitals win, MCOs lose, and vice versa, the next several months of 2021 should turn out that way in favor of the health care facilities, BoA concluded in a recent research note.

Five Health Care Investments to Buy Highlighted by HCA Healthcare

For hospital chains such as HCA, first-quarter 2021 volumes may underwhelm as COVID volumes slow, core volumes climb modestly and the impact of severe storms in February is measured. March volumes are likely to be strong, especially for non-COVID care, according to BoA.

In addition, non-COVID volumes are likely to snap back faster the more virus cases wane, so a possible first-quarter 2021 volume miss due to low COVID numbers would be bullish for an industry rebound in the second quarter. Plus, strong cost controls mean that earnings before interest, taxes, depreciation and amortization (EBITDA) numbers are still likely to move up even if first-quarter volume is a bit weak, BoA commented in a recent research note.

“HCA is the best in class name, with significant capital deployment upside,” BoA opined.

The investment firm put a $215 price objective on 10.0x its 2021 estimates for the hospital chain’s EBITDA, above the high end of its historical 6-9x multiple range, as HCA’s peers receive significant stimulus from the government. HCA further has a strong balance sheet that leaves the company well positioned during uncertain times, BoA added.

“Risks to the downside are that margins are pressured as volumes return at scale, that payor mix deteriorates quickly as unemployment rises, that labor costs continue to rise, or that volumes reaccelerate slower than expected following COVID-19,” BoA wrote.

Chart courtesy of www.StockCharts.com 

UnitedHealth Group Earns Place Among Five Health Care Investments to Buy

As far as health care investors who are looking ahead to 2022, MCO should have reduced risk by then when a sense of normalcy should return to the industry as COVID-19 risks subside. In sum, 2021 is an economic reopening trading opportunity that should lift hospitals, while the theme of 2022 should be normalization and particularly aid MCOs, according to BoA.

“Although we expect volumes to accelerate, we don’t see risk to MCO numbers on conservative guidance and strong reserves but do believe that multiple expansion from here is unlikely until investors can fully turn their attention to what will likely be a better 2022 — likely sometime in the August-October time frame,” BoA wrote. “As a result, we continue to favor hospitals over MCOs for 2021, but see MCOs starting to work better as we near 2022.”

Despite a recent MCO rebound, MCOs may be more cautious about pent-up demand returning in the second half of 2021, BoA wrote. However, COVID headwinds in 2021 should become tailwinds in 2022 to propel MCOs, the investment firm predicted.

UnitedHealth Group (NYSE:UNH), a Minnetonka, Minnesota-based provider of health care products and insurance services, should hit its stride again by third-quarter 2021, when BoA predicted the company would beat analysts’ expectations and possibly boost long-term growth prospects in 2022. The next run for UNH and its peer MCOs could start in August with “easy” comparisons from a COVID-ravaged 2020, BoA continued.

BoA Gives Five Health Care Investments to Buy a $415 Price Objective

BoA placed a $415 price objective on UnitedHealth Group based on 22.9x a 2021 earnings per share (EPS) estimate, marking a slight premium to UNH’s five-year historical average of 18.1x. That forecast is justified by significant growth potential of Optum, UNH’s Health Care Services platform, BoA opined.

Downside risks to that price objective are that health care utilization rebounds faster than expected, that growth targets for Optum are not achieved, or that political risk intensifies, BoA commented. Additional uncertainty stems from the company naming Sir Andrew Witty as its chief executive officer to succeed David S. Wichmann, who retired after guiding the company through a period of growth and innovation despite the deeply challenging onset of the COVID-19 pandemic.

“As we have come to know firsthand during his time at UnitedHealth Group, Andrew Witty combines an extraordinary breadth and depth of health care experience, sophisticated strategic thinking and outstanding leadership development skills, making him uniquely well-positioned to help the company take the next steps on its steady path to grow and deliver for its shareholders and the customers and people we are privileged to serve,” said Stephen J. Hemsley, chairman of the UnitedHealth Group Board of Directors, in an announcement of the leadership change.

Witty was named CEO of Optum in March 2018 and added the role of president of UnitedHealth Group in November 2019. He previously served as a UnitedHealth Group company director. From April 2020 to December 2020, Witty took an unpaid leave of absence from his company positions to serve as a global envoy for the World Health Organization’s COVID-19 efforts. He also advised the UK Government COVID Vaccine Taskforce.

The company reiterated its 2021 outlook for adjusted net earnings of $17.75 to $18.25 per share and its commitment to a long-term 13% to 16% growth rate.

Chart courtesy of www.StockCharts.com 

Five Health Care Investments to Buy Include Newly Public Oscar Health

BoA initiated coverage of New York-based Oscar Health (NYSE:OSCR), a newly public MCO, with a Buy rating, while forecasting high growth helping to spur a potential 50% jump in its share price. Oscar Health, a technology-driven health insurance company, will be aided by new business lines, geographic expansion, proprietary technology and upside from HealthIT deals, according to BoA.

Risks include unproven technology and execution risks, BoA continued. However, BoA described Oscar Health as one of the fastest-growing companies it tracks and worthy of a $39 price objective. Based on the stock’s closing price of $25.61 on March 30, OSCR has the potential to jump 52.28% if it attains the price target.

“OSCR is a tech-enabled health insurer that focuses on the Individual ACA Exchanges today but is rapidly expanding into other health insurance markets such as Medicare Advantage (MA) and Small Group through its partnership with Cigna,” BoA wrote. “Taken together, OSCR has good visibility into growing revenues 30%-40%-plus per year organically for the next several years and achieve Insurance segment profitability by 2023.”

OSCR has entered new markets and quickly ramped up its share of them by achieving 70% membership growth in 2020, despite a relatively stagnant overall individual market, according to BoA. There is plenty of space left for geographic expansion to continue, but OSCR is also poised to benefit from legislative tailwinds as President Biden’s agenda is set to bolster enrollment by increasing subsidies and making them more widely available. 

The MCO also recently expanded into the fastest growing segment of Managed Care, Medicare Advantage and the underpenetrated Small Group employer market with less than 1% share in each product, BoA commented. Finally, OSCR can monetize its technology through arrangements with smaller MCOs in what it estimates as a $123 billion opportunity, BoA added.

Chart courtesy of www.StockCharts.com 

Kramer Likes Oscar as One of Five Health Care Investments to Buy

“Oscar is extremely interesting now that it’s gone public,” said Hilary Kramer, who hosts the nationally aired “Millionaire Maker” radio program and heads the GameChangers and Value Authority advisory services. “We’re looking for the bottom before buying in.”

Paul Dykewicz conducts a pre-COVID-19 interview with Hilary Kramer, whose premium advisory services include IPO Edge2-Day TraderTurbo Trader and Inner Circle.

Pharmaceutical companies offer another investing opportunity in the health care industry, said Bob Carlson, who also is the chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

“Pharmaceutical companies adapted quickly to the pandemic, shifting resources into treatments and, most importantly, vaccines,” said Bob Carlson, who leads the Retirement Watch investment newsletter. “But the stock market didn’t reward their efforts.”

Instead, pharmaceutical stocks trailed the S&P 500 during the last year, Carlson continued. Part of the reason is the vaccine makers did not receive as much money as they would have in normal times when selling their vaccines to governments, he added. Another reason they lagged is many people avoided doctor’s offices and hospitals to avoid getting infected, so pharmaceutical sales weren’t robust.

Pension fund and Retirement Watch leader Bob Carlson answers questions from Paul Dykewicz prior to COVID-19-related social distancing.

The result is drug stocks now sell at only 13 times earnings, well below the S&P 500’s 22 times earnings, Carlson commented. Pharmaceutical stocks haven’t sold at a discount like this in 20 years, he added. 

“The companies should benefit both from the work they did during the pandemic and from the reopening of the economy,” Carlson told me.

There are two good ETFs to consider: SPDR Select Health Care (XLV) and Van Eck Vectors Pharmaceutical (PPH). The Van Eck ETF is more of a pure play on the sector.

Chart courtesy of www.StockCharts.com

Chart courtesy of www.StockCharts.com

“There are significant differences in their portfolios, so consider investing in both,” Carlson said.

COVID-19 Threat Remains a Further Risk, Despite Vaccinations

COVID-19 vaccinations are giving hope that new cases and deaths due to the virus will slow but the problem still persists. The Food and Drug Administration (FDA) recently approved a third COVID-19 vaccine to allow additional people to be vaccinated but cases are on the rise again in many states.

U.S. COVID-19 cases reached 30,393,702 and led to 550,996 deaths, as of March 31. COVID-19 cases worldwide have hit 128,224,509, while deaths have soared to 2,803,806, according to Johns Hopkins University. America has the dubious distinction as the nation notching the most COVID-19 cases and deaths.

The five health care investments to buy provide investors with a handful of choices to profit. Heightened COVID-19 vaccine availability and the economic reopening are two big pluses that should help the five health care investments to buy.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and

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