Mad Hedge Biotech and Healthcare Letter
February 3, 2022
Fiat Lux
Featured Trade:
(A ‘BORING’ BUSINESS RESISTING THE ‘AMAZON EFFECT’)
(CVS), (UNH), (ANTM), (TDOC), (AMZN), (BRK.A), (BRK.B), (JPM)
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The healthcare market is under attack.
Amazon (AMZN) is invading the healthcare sector, wielding its far-reaching online presence and countless distribution warehouses to dominate the market.
Leveraging its ability to offer quick shipping to practically all locations, Amazon has transformed into a grab-anything-and-everything-possible business.
Now, it has set its sights on the healthcare and prescription sector. In fact, it has been attempting to infiltrate this segment since 2018 when it acquired PillPack.
The only limitation of that deal was that customers still had to get prescriptions from their doctors to avail of the PillPack service.
However, Amazon’s not the only one seeing the potential of this sector.
Following the difficulties it encountered in cornering the market, the e-commerce giant collaborated with fellow Wall Street titans Berkshire Hathaway (BRK.A) (BRK.B) and JPMorgan (JPM). Together, the three companies launched a service they called “Haven.”
Unfortunately, the venture eventually fell apart, and they canceled the deal altogether.
Despite that unfortunate end, Amazon refuses to back down on its vision. Recently, it decided to take another stab at the venture with a rebranding, giving birth to AmazonCare.
The goal is to offer assistance to customers in booking doctor appointments and receiving prescriptions online.
Undeniably, any business endeavor with Amazon’s backing will make waves in any industry. Nonetheless, this new venture could still be a tough sell.
For now, the company's strength is hoping to use the “Amazon effect” to sway members into signing up and using AmazonCare as well.
Surprisingly, Amazon finds itself facing an unlikely challenger in this pursuit: CVS (CVS).
Like Amazon, Berkshire, and JPMorgan, CVS has also recognized the potential of this market.
Unlike Amazon’s partners, CVS has decided to invest to become a frontrunner in terms of dominating the same sector and eventually taking advantage of this rapidly expanding total addressable market.
Instead of following the track of its fellow healthcare providers, such as UnitedHealth (UNH) and Anthem (ANTM), CVS has opted to change its angle of attack in the hopes of gaining more market share and reaping higher profits.
CVS is putting to good use its over 9,900 stores and distributions as means to establish better connections and rapport with customers.
After all, statistics indicate that approximately 80% of American citizens live less than 10 miles from a CVS branch.
This offers CVS a competitive advantage in terms of proximity to its customers. That is, it offers a unique convenience as it serves as the ever-present “corner stores” in practically every city.
Leveraging the locations, CVS has set up about 1,500 branches into “HealthHubs” by the end of 2021.
Basically, HealthHubs serve as emergency care clinics found inside CVS stores, providing customers with easy access to convenient and even cheaper after-hours health checkups.
Aside from this feature, a growing number of CVS stores are starting to get set up to be able to ship medicines or any other products ordered online, while other branches are being eyed as potential UPS drop-off points.
This setup will transform several branches into convenient “mini” distribution centers.
CVS has broken out of its “boring corner drugstore” image following its decision to target a more lucrative and massive healthcare sector.
It started the ball rolling when it acquired Aetna for $69 billion—a decision that so many investors disapproved of at that time.
Until recently, the market has largely ignored CVS because of the debt it incurred from the Aetna deal.
However, the tides had turned when investors finally realized that the drugstore giant had been efficiently and effectively executing a brilliant strategy all this time.
With Aetna under its wing, CVS has been granted access to a multitude of healthcare and managed care benefits availed by more than 23 million members. The sheer number of subscribers transformed the company into the third-biggest health insurer in the United States—next only to decades-long established providers Anthem and UnitedHealth.
Riding this momentum, CVS has been aggressive in revamping its image and expanding its services.
On top of its HealthHubs and Aetna advantages, CVS has recently paired up with Teladoc (TDOC) to leverage its virtual healthcare services to offer even more convenience to its customers.
This is another massive market since CVS already has roughly 35 million digital customers subscribed to its CVS app.
These users are all ordering products and other prescriptions from CVS. Integrating Teladoc’s services to the mix would be a surefire way of boosting its membership and adding a lucrative revenue stream.
Keep in mind that the global market for telehealth services is projected to expand somewhere between $300 billion to $700 billion by 2028—and that’s a conservative estimate.
CVS’ move to use Teladoc software is a positive indication of early technology adoption, positioning the drugstore chain at the forefront of a healthcare revolution.
Overall, CVS can only be described as a company striving to become a unique business that offers a range of products that no one else in the industry provides.
Although it’s improbable that it’ll sustain a monopoly in these services, CVS has been gradually transforming and growing into an almost unbeatable force in the industry by leveraging its strengths in an effective and logical method.
Moreover, it has evolved from a stodgy drugstore into an early tech adopter and a revolutionary business that can stand to challenge the likes of Amazon.
Mad Hedge Biotech and Healthcare Letter
January 18, 2022
Fiat Lux
Featured Trade:
(THE PERFECT COUNTERBALANCE FOR A VOLATILE TECH)
(CI), (ANTM), (CVS)
Investing in quality stocks is a surefire way to slowly build a healthy portfolio over the years.
As long as you buy and hold stocks that have the potential to expand and offer stable financials continuously, then you’ll be securing your long-term success.
Obviously, this strategy is less risky compared to jumping on every new bandwagon and believing hyped ideas.
Then, there are breakthrough ideas that look too good to pass up. A good example is the cryptocurrencies such as Bitcoin and Ethereum.
Both operate on blockchain technology, which holds the potential to revolutionize practically all industries by decentralizing them and utilizing data in more efficient ways.
While investing in this kind of technology can definitely be exciting and thrilling, it’s undeniably scary for some who are still unfamiliar with it.
But, what if there’s a safer and more traditional way to get your foot in this groundbreaking technology?
Here’s where Cigna (CI) comes in.
Cigna is one of the handful of companies that are looking into integrating blockchain into their business, such as accepting cryptocurrencies as an additional form of payment.
Needless to say, investing in Cigna would offer you exposure to this new and emerging blockchain technology sans the risk that comes with every new technology.
This is a unique move considering that health insurance stocks are not exactly widely known as proponents of cutting-edge technology.
Aside from Cigna, other providers have been looking into leveraging blockchain to improve their operations. Some names associated with this project include Anthem (ANTM), CVS (CVS), and Cleveland Clinic.
Although blockchain remains in the early innings in terms of its existence in the healthcare industry, investors seeking some exposure would benefit from this reasonably safe option.
After all, Cigna is nothing but a safe stock.
Everyone has practically heard of the company.
Cigna provides Medicare and Medicaid products and insurance coverages not only within the United States but also in some international markets.
Known as a “global health service company,” it has approximately $64.5 billion in marketing capitalization and is considered the fifth-biggest healthcare organization in terms of revenue.
In 2021, it reported over $160 billion in revenue and has managed to rake in profits consistently.
With a net margin of roughly less than 6% of its sales, Cigna has been an investor darling by being consecutively in the black in the last 5 years.
For its 2022 plans, Cigna aims to grow its addressable market to add 3 new states and 93 new countries to reach 1.5 million new customers eventually.
The company also recently secured a new 7-year deal with the US Department of Defense, which would hand over the handling of the healthcare services of roughly 9.6 million active-duty service members to Cigna.
Moreover, Cigna has been working on targeting high-margin sectors like specialty pharmacies.
One of these businesses is Accredo, which manages individuals suffering from complex and hard-to-treat chronic ailments. These conditions include HIV, hepatitis C, and even cancer.
These types of illnesses demand a lifetime’s worth of medications with astronomical price tags. Clearly, being able to get a foothold in this segment would open up a lucrative revenue stream for Cigna.
Basically, Cigna is not your typical flashy stock that gains much attention from the market or the news. Nonetheless, it’s a solid pick that never fails to get the job done.
If anything, investing in Cigna would mean buying and forgetting about it while you collect a stable dividend yield of roughly 2% from this healthcare provider—a solid yield that’s better compared to the 1.3% average of the S&P 500.
So, for cryptocurrency fans, buying Cigna shares would simply be a way to diversify into a sector where you won’t really anticipate that much bullishness on blockchain.
Mad Hedge Biotech & Healthcare Letter
June 1, 2021
Fiat Lux
FEATURED TRADE:
(AN UNDERRATED HEALTHCARE STOCK)
(UNH), (ANTM), (HUM)
Value investors on the lookout for stable stocks in the healthcare and insurance sectors should not miss out on a particular company that has consistently delivered strong performance over the years: UnitedHealth Group (UNH).
Despite its notable performance in the past 10 years and tangible plans that lead to more room for growth, UNH is still remarkably undervalued.
With the expanding reach of the COVID-19 vaccines and the promising prospects offered by Medicaid and Medicare expansion efforts, the future of this health insurance provider definitely looks bright.
In fact, this stock managed to weather the devastating effects of the COVID-19 pandemic and did pretty well in 2020.
Shares of this health insurance titan actually climbed 19%, beating the S&P 500 index.
What’s even more promising is that UNH appears to be doing better in 2021.
In its first-quarter earnings report, UNH recorded a 9% jump in its revenue for the first quarter of 2021 at $70.9 billion compared to the $64.4 billion reported in the same period in 2020.
In terms of its net income for the quarter, UNH raked in $4.9 billion compared to the $3.4 billion it reported last year.
This puts its earnings per share at $5.31, a notable bump from the $3.72 recorded in the same period a year ago and blowing past analyst estimates of $4.38 per share.
With a $388.73 billion market capitalization, UNH is easily one of the biggest companies in its field. In comparison, competitors like Anthem (ANTM) hold a market cap of $97.5 billion, while Humana (HUM) has $56.47 billion.
Leveraging its size and power, this healthcare giant has ventured into diversifying its portfolio to ensure consistent results amid the never-ending changes in the healthcare industry.
Looking at the numbers closely, UNH’s health insurance segment brought in the bulk of the revenue in the first quarter with $55.1 billion, up by 7.9% compared to last year.
Membership count also increased by over 1 million during this period, which could be primarily attributed to the strong growth of its Medicare Advantage program.
The addition of specialty services, like dental and vision insurance, also contributed to the sustained development of this segment.
Meanwhile, UNH’s Optum division saw a 10% increase in its revenue year-over-year to reach $36.4 billion.
Even its OptumHealth segment delivered a particularly strong performance, with its revenue jumping by 31% compared to the same period last year.
UNH’s technology services sector, OptumInsight, also experienced revenue growth to reach $20.8 billion this quarter.
Even UNH’s weakest link, its OptumRx sector or the pharmacy benefits management division, experienced a slight increase in its revenue to hit $21.6 billion year over year.
These numbers show how UNH is split into two major groups. One sector offers traditional insurance plans, while the other, Optum, offers pharmacy and doctor services.
In 2020, its insurance segment comprised 60% of UNH’s overall revenue, while Optum generated the remaining 40%.
This translated to $257 billion in revenue from the insurance plans and $103 billion generated by its Optum services division.
Considering that UNH appears to be performing better than originally projected, its earnings guidance for 2021 was adjusted to reflect the changes.
To date, the company estimates its adjusted earnings to be somewhere between $18.10 and $18.60 for each share.
UNH utilizes a balanced business approach, which covers both traditional services in the health insurance sector and a variety of innovative solutions courtesy of its Optum units.
So far, this strategy has paid off well in the long run. As we see the world go back to normal, it is expected that UNH would enjoy even more tailwinds in its favor.
UNH is a solid stock that deserves a spot in any value investor’s portfolio.
If the efforts to fight the COVID-19 pandemic prove to be successful this year, then UNH expects an even better performance in 2022.
Mad Hedge Biotech & Healthcare Letter
April 20, 2021
Fiat Lux
FEATURED TRADE:
(A DEPENDABLE BUT UNDERVALUED HEALTHCARE STOCK)
(UNH), (ANTM), (CI), (HUM), (CNC), (CHNG)
The ongoing seesaw fights in the stock market are causing too much drama that cunning investors can—and definitely should—steer clear from.
Instead of fretting over speculative and risky investments, it’s better off staying with tested and proven big-name companies that will remain solid buys for the years to come and continue to deliver positive results despite periods of uncertainty.
Among the huge names in the healthcare industry, United Health (UNH) is a strong contender that meets the criteria.
After almost a decade of delivering high returns, which shows off fast-rising earnings expectations, it’s interesting to see that the market has recently backed away from this blue-chip stock.
Nonetheless, the market’s skittishness offers an opening for investors looking to buy in the dip a company that pays dividends and promises to steadily boost your savings in the years to come.
Founded way back in 1974, UNH has become a top name in the healthcare industry, landing in seventh place on the Fortune 500 list.
To date, UNH has four main divisions handling its over 50 million members both in the US and across the globe: its private health insurance business UnitedHealthcare, its pharmacy benefits segment OptumRx, its healthcare services provider branch OptumHealth, and its analytics platform OptumInsight.
UNH has a market capitalization of $354 billion.
In comparison, the closest competitor is Anthem (ANTM), with $87.93 billion. In terms of market cap, the two are followed by Cigna (CI) with $85 billion, Humana (HUM) with $53.81 billion, and Centene (CNC) with $36.19 billion.
Amid the financial crisis brought about by the pandemic, UNH still reported a 6.2% jump in its revenue in 2020 to reach $257.1 billion.
The company’s most prominent growth driver is its Optum line, and UNH is making sure that this division continues to grow.
One of the most indicative moves towards that direction is UNH’s $7.8 billion acquisition announcement of technology and data analytics company Change Healthcare (CHNG), which should be completed by the second quarter of 2021.
In the agreement, UNH is offering Change Healthcare $25.75 for its shares, representing a premium of roughly 41% above the latter’s stock price.
UNH plans to merge Change Healthcare’s operation into OptumInsight, which currently handles hospital systems health plans, life sciences companies, and even governments.
In the first nine months of 2020 alone, OptumInsight generated over $1.9 billion, contributing to roughly 11% of UNH’s total bottom line.
The combination of these two will all but guarantee that UNH’s possession of the biggest and most powerful platform in the entire healthcare industry, with the acquisition projected to add approximately $470 million to the company’s adjusted earnings in 2022.
The decision to acquire Change Healthcare is part of the string of M&A deals executed by UNH to stay ahead of the game.
In 2019, it bought two companies to expand its operations: the DaVita Medical Group for $4.3 billion and Equian for $3.2 billion. Prior to these, UNH splurged on a $12.8 billion acquisition of Catamaran in 2015.
For 2021, UNH projects its earnings to increase, estimating its per-share profits to be somewhere between $16.90 and $17.40—and that estimate already took into consideration the headwinds involving COVID-19 that could still weigh on the company’s bottom line.
While this may appear optimistic, the truth is, generating strong results isn’t a novel accomplishment for UNH.
In the past three years, the company reported a net income of $10 billion or higher, with net margins recorded at 5% above its revenue.
Over the course of the last 12 months, UNH stock has climbed 24%, beating the S&P 500, which rose 18% during the same period. It also offers a decent dividend of 1.5%, which is admittedly slightly lower than the S&P 500 average at 1.6%.
Overall, UNH is a safe stock that you will not have to anxiously watch over and can hold in your portfolio for years.
More importantly, this company remains undervalued and still shows a lot of room for growth.
So if you’re a value investor looking with an interest in the insurance and healthcare services industry, then this market leader is a sustainable addition to your portfolio.
Mad Hedge Biotech & Healthcare Letter
January 7, 2021
Fiat Lux
FEATURED TRADE:
(LEFTOVER STOCKS RIPE FOR THE PICKING)
(ANTM), (UNH), (CVS), (TDOC)
One of the key things to remember in choosing companies to invest in is their long-term prospects. With these firmly in place, compounding can practically do most of the heavy lifting in the years to come.
Sure. It’s easy to be blinded by hot growth businesses these days—ones that seemingly promise unabated growth forever or those with cheap valuations but with no definitive growth prospects.
That is, you need to find businesses with not only promising prospects but are also trading at reasonable valuations. This requires a delicate balancing act.
With that balance in mind, one of the most obvious trends that fits the bill is to capitalize on the aging populations across the world.
As people age, it will drive higher demand for a myriad of healthcare services and the sector that responds most to this trend is the medical insurance segment.
Among the companies in this industry, I find Anthem (ANTM), UnitedHealth (UNH), and CVS Health (CVS) to bring the most bang for your buck.
While these companies are as fun to talk about as an actuarial table, they offer predictable cash flows and long-term prospects at reasonably priced valuations.
Let’s take Anthem for example.
From a valuation point of view, Anthem has traded hands at roughly 11.5 times its trailing earnings. More impressively, those earnings are estimated to increase by approximately 14.5% clip over the next five years.
That’s a reasonable, if not really cheap, price to pay for a company that’s well-positioned for what the future is expected to bring.
The aging population will also swell the ranks of UnitedHealth, being the largest health insurer in the country with over 14 million members in its Medicare programs.
Among the three, I find CVS the most intriguing.
The problem with this business is that people generally believe it’s only a pharmacy company. The truth is, it’s only one facet of CVS’ business, and, surprisingly, that’s its least profitable sector to date.
During the first six months of 2020, the total revenues of CVS went up 5% year over year to $132 billion.
Meanwhile, revenues of its pharmacy services sector grew by 2% compared to the same period in 2019 while its retails segment increased by 3%.
Notably, the biggest gainer is its healthcare benefits segment with a 6% jump year over year in revenues.
During these six months, CVS increased its medical memberships by 134,000 individuals to add Medicare and Medicaid insurance products.
On top of these, CVS reported that it had administered almost 2 million tests for COVID-19 in July—a number that continued to grow as the pandemic progressed throughout 2020.
Taking cue from the success of companies like Teladoc (TDOC), CVS also invested heavily in telehealth services.
In its second quarter earnings report, the company recorded a 15% increase in the number of its HealthHUB visits for regular members and Aetna cardholders.
This 2021, CVS plans to boost its digital health services by adding more segments like a behavioral support unit.
Overall, CVS has been performing better than its peers despite the pandemic thanks to its efforts on transforming itself into a more affordable healthcare benefits provider.
In fact, the company raked in $4.9 billion in profits in July 2020 alone—a whopping 48% jump from its performance in the previous year over the same period.
Most importantly, CVS is offering a dividend of $0.50 per share. Although the company hasn’t exactly raised this since 2017, it remains a preferable yield of 3.54%. This is way better than the average 1.8% payout from the S&P 500.
Despite all these, CVS is still one of the unpopular stocks among investors today.
All three companies have managed to still make a notable profit and fared relatively well despite the pandemic.
They are also underpriced, trading at roughly 14 times earnings or even less. On top of these, each pays dividends and offers an ROE of at least 11%.
Keep in mind that aging is an unstoppable and undeniable trend.
You’ve heard about the large number of Baby Boomers hitting retirement age, with the last of the roughly 72 million from that generation in the US alone turning 65 by 2030.
By 2034, older adults will outnumber children aged 18 and under. That has never happened in American history.
This isn’t a unique case in the US either.
The same is happening in Europe, where 1 of 5 people is already at least 65 years old. Asia is also expected to experience the same thing within the decade, particularly in South Korea and Singapore.
All three stocks, Anthem, UnitedHealth, and CVS offer reasonable opportunities at their current prices. They actually fit the textbook definition of value stocks. Hence, buying and holding these stocks is one of the most straightforward strategies over the next decade and beyond.
To put it simply, this only means one thing. For investors of these medical insurance stocks, time is literally on your side.
