Buyers Return to Health Care Plan Stocks

Industry sits well positioned to benefit from sector rotation

Health care takes the unenviable title for worst performing sector year to date (YTD), returning 5.20% compared to the broader market's gain of nearly 20%. Discussions surrounding major health care reform, such as universal health care proposals put forward by leading Democratic 2020 presidential election candidates, have weighed heavily on the group for much of the year.

However, with no end in sight of a breakthrough in trade negotiations between Washington and Beijing and escalating tension in the Middle East, defensive health care stocks may provide a rewarding opportunity in a volatile market environment.

Furthermore, the health care providers and services industry trades at around 15 times forward earnings, below the S&P 500's multiple of 18 times. Combine attractive valuations and recent underperformance with upbeat full-year (FY) earnings guidance from industry leaders, and the segment sits ideally positioned to benefit for sector rotation – even as regulatory uncertainty persists.

Below, we give three health care plan stocks a checkup and discuss several trading possibilities using technical analysis.

Anthem, Inc. (ANTM)

Anthem, Inc. (ANTM) offers managed care health benefit plans to the large and small group, individual, and Medicaid and Medicare markets. The Indianapolis-based health care plan company posted earnings per share (EPS) of $4.64 on operating revenues of $25 billion in the second quarter. The results came in above Wall Street expectations to register top- and bottom-line year-over-year (YoY) growth of 10.8% and 9.2%, respectively. Furthermore, the company has raised its FY 2019 guidance, now expecting adjusted net income to exceed $19.30 per share, up from $19.20 per share. Anthem announced in March that it had revised its pharmacy benefit manager (PBM) strategy to be more transparent and customer-friendly, with the new PBM passing along rebates to pharmacy customers. Management hopes that the revamp will reduce costs and simplify services. The company's stock has a market cap of $66.15 billion, offers a 1.26% dividend yield, and is trading virtually unchanged on the year as of Sept. 17, 2019.

Anthem shares have traded sideways for most of 2019, with neither the bulls nor bears able to seize control. The August retracement found support around $250 – the level from which the stock launched its January rally. A recent cross of the moving average convergence divergence (MACD) line above its signal line suggests further upside in the coming days. Those who execute a trade here should aim to book profits near the July swing high at $311.47 and limit downside with a stop-loss order placed beneath this month's low at $247.61.

Chart depicting the share price of Anthem, Inc. (ANTM)

Cigna Corporation (CI)

Cigna Corporation (CI) provides insurance and related products and services in the United States and internationally through various business segments: Integrated Medical, Health Services, International Markets, and Group Disability and Other. The $62.49 billion health care giant recorded a second quarter profit of $4.30 per share to deliver a 15.3% earnings surprise. Revenue during the period increased 198% compared to the year-ago quarter due to the company's acquisition of Express Scripts. Cigna has revised its FY 2019 earnings guidance range to between $16.60 and $16.90 from between $16.25 and $16.65. Deutsche Bank analyst George Hill recently set a $207 price target on Cigna stock, saying that he sees no short-term earnings risk and that he likes the company's diversified income stream. As of Sept. 17, 2019, Cigna shares issue a 0.02% dividend yield and have slumped almost 13% YTD.

Since gapping nearly 12% higher on July 11 after the Trump administration scrapped a plan to curb rebates that drug manufacturers pay to PBMs, the Cigna share price swiftly pulled back toward its $141.95 YTD low. The stock has staged somewhat of a recovery from this level and now trades above the "handle" of a developing cup and handle pattern. Traders who go long should set a take-profit order around $200, where the price may run into resistance from a horizontal line that connects several previous swing points. Protect capital by placing stops below an area of support at $155.

Chart depicting the share price of Cigna Corporation (CI) 

Humana Inc. (HUM)

Humana Inc. (HUM) offers medical and supplemental benefit plans to individuals. It specializes in government-sponsored programs, with the majority of its medical membership coming from individual and group Medicare Advantage, Medicaid, and Tricare. The 0.80% yielding health care player impressed investors with robust quarterly results, beating both earnings and revenue consensus forecasts to record respective YoY growth of 52.8% and 14% for the June quarter. Moreover, the $37.59 billion company now expects to add between 480,000 and 500,000 members in FY 2019, up from its previously projected target of between 415,000 and 440,000 members. Although Humana stock has fallen 2.67% YTD, it is still outperforming the health care plans industry average by 2% as of Sept. 17, 2019.

A cup and handle pattern has also formed on the Humana chart throughout 2019. The "handle" appears to have found support from the December/January swing low and 200-day simple moving average (SMA), increasing the probability of a rise from current levels. A recent cross of the 50-day SMA above the 200-day SMA adds further buying conviction. Those who decide to trade the stock should anticipate a move to overhead resistance at $310 while keeping stops situated underneath the support area mentioned above.

Chart depicting the share price of Humana Inc. (HUM)
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