HMO Industry Surges Almost 4 Times S&P 500: 4 Picks

 | Dec 03, 2018 08:01PM ET

The Health Maintenance Organization (HMO) industry has been one of the solid gainers so far this year, despite the stiff regulations binding it. Interest rate hike and trade war disturbances, which caused far and wide fluctuation to returns of many industries like utilities, banks, automobiles, manufacturing, have little or almost no effect on this industry of the health care sector.

The S&P 500 Managed Health Care Index has gained 23.7% in a year's time compared with the 6.12% rise in the S&P 500 Index.

The ruling factors of the HMO industry are the many state and federal regulations that monitor their working and affect their business performance. The most stringent regulatory reform was the Affordable Care Act that was enacted in 2010. But insurers have synced their operations in line with the regulatory mandates, which are now paying off.

The year also saw many trials by the Trump administration to repeal the ACA, which however, failed to take place. The changes, if would have taken place, would have led insurers to again adapt to new regulations, thus subjecting them to again redo some parts of their business workings.
But mid-term elections, which saw the change in Republican control in the house of representatives, have now further pushed backed or almost put off the table any changes that would be made to the ACA in the near term. This implies that the existing regulations would continue and health insurers will not have to commit resources to fine tune their operations at least for now.

An increase in employment has also induced demand for health insurance from employers for their employees, aiding revenue growth for the health insurance companies. Also, changes in demography with baby boomers retiring in hordes each day, have driven up demand for Medicare plans of the HMOs.

Moreover, business growing outside the health insurance realm has diversified earnings of the players in the industry. The poster child of the same is the development of the Optum unit of UnitedHealth (NYSE:UNH), which has contributed to an increasing proportion of revenues to its consolidated revenues and falls outside the regulations that bind the business of health insurance. Other companies such as Humana and Anthem have also been consistently growing their health service business.

Zacks Industry Rank and Returns

The group’s Medical sector, currently carries a Zacks Industry Rank #38, which places it at the top 15% of 257 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. In a year’s time, the industry’s earnings estimate for the current year has gone up 17.2%.

The Zacks Medial-HMO on industry, which is a stock group within the broader Zacks Medical Sector, has outperformed both the S&P 500 and its own Medical sector over the past year.

We see that the stocks in this industry have collectively gained 29.3% over the past year, while the Zacks S&P 500 composite and Zacks Medical Sector have rallied 4.7% and 4.5%, respectively.