Managed care stocks have come under heavy selling pressure since a "Medicare-for-All" bill was submitted to the House of Representatives by Rep. Pramila Jayapal on Wednesday, Feb. 27. The bill essentially proposes moving away from the current multi-payer system to a simplified government-funded single-payer system over a two-year transition period. Since the bill made its way into the House, the S&P 500 Managed Health Care subindex (^SP500-35102030) – a benchmark for stocks in the sector – has fallen 9.5% as of March 5, 2019.
Although most analysts believe that the proposed bill has little chance of passing a Republican-controlled Senate, investors have been quick to offload shares in managed care stocks over fears that both parties may feel pressure to act on cutting health care costs ahead of 2020 election.
"In our view, the bill has no chance of passing the [Republican]-controlled Senate and probably little chance even in the [Democrat]-controlled House given Speaker Pelosi's apparent ambivalence," JPMorgan Chase analyst Gary Taylor wrote in a note, per a MarketWatch article.
From a chart perspective, leading stocks in the managed care sector have fallen toward key support levels, with indicators flashing short-term oversold conditions. Those who believe the sell-off is overdone should run their eyes over these three trading ideas.
Humana Inc. (HUM)
Humana Inc. (HUM) specializes in providing government-sponsored plans, with the majority of its membership linked to health care programs such as Medicare and Medicaid. The Louisville, Kentucky-based company exceeded analysts' fourth quarter earnings and revenue estimates and expects 2019 adjusted earning per share (EPS) of between $17.00 and $17.50. Humana trades at 23.9 times earnings, slightly below the industry average P/E ratio of 25.2. The stock, with a market capitalization of $37.64 billion and issuing a 0.70% dividend yield, is down 3.08% year to date (YTD) as of March 5, 2019.
Humana shares sold off sharply in November and December but recovered roughly half of those losses in January. The stock then traded sideways for most of February until selling off again on the "Medicare-for-All" bill news in the later part of the month. Traders should look for an entry point at the $270 level, where the price is likely to encounter support from the early January swing low. Consider banking profits on a move back up to $310 – an area where the stock may run into resistance from several swing highs and the 200-day simple moving average (SMA). Protect trading capital by placing a stop-loss order about 10 points below the entry price.
UnitedHealth Group Incorporated (UNH)
Dow component UnitedHealth Group Incorporated (UNH) provides health insurance services to its individual, employer and government-sponsored members through insured and fee-based plans. The company's insurance business, UnitedHealthcare, reported fourth quarter revenue of $46.2 billion, up 11.1% on a year-over-year (YoY) basis. It added 2.4 million new members during 2018, nudging its total membership count to nearly 50 million. Trading at $236.02, with a market cap of $226.47 billion and yielding 1.49%, UnitedHealth Group stock is down 1.19% YTD, underperforming the Health Care Plans industry average by about 1% as of March 5, 2019.
The health insurer's share price has fallen away on above-average volume in recent trading sessions as traders digest the impact of possible government measures to curb health care costs. Despite the sell-off, the stock provides a swing trading opportunity at the $233 level, where the price is likely to find support from December's swing low. The prospect of a bounce increases at this level given that the relative strength index (RSI) shows short-term oversold conditions with a reading below 30.0. Think about positioning a take-profit order near $270 – in the proximity of last month's high – and close losing trades if the stock pushes below $230.
Cigna Corporation (CI)
With a market cap of $65.37 billion, Cigna Corporation (CI) provides health insurance services to individuals, primarily through the group market. The managed care giant completed a $54 billion acquisition of Express Scripts Holding Co. in December to take advantage of synergies by managing both medical and drug benefits. Cigna projects a 2019 EPS range of between $16.00 and $16.50 and expects revenue to remain between $131.5 billion and $133.5 billion. Independent investment bank Raymond James Financial upgraded Cigna shares from "market perform" to "outperform" on Jan. 3, 2019. Cigna stock has fallen almost 10% YTD as of March 5, 2019. It pays a forward dividend yield of 0.02%.
Cigna shares have traded within an orderly descending channel over the past three months that provides traders with clear support and resistance levels. The price has fallen without much retracement since touching the channel's upper trendline in mid-February and is now approaching support from the pattern's lower trendline at $165. Those who intend on taking a long position in this area may want to see a reversal candlestick pattern form to indicate that buying interest has returned. In terms of trade management, consider taking profits toward the top of the pattern at $195 and setting a five-point stop.