Managed care stock sell-off could be a buying opportunity, says Wells Fargo (HUM)

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Managed care stocks could be a buying opportunity despite concerns that a higher-than-expected uptick in Medicare procedures will likely weigh on corporate profits in the near-term, according to Wells Fargo.

Last week saw a significant sell-off in the sector, triggered by remarks made by UnitedHealth management on June 14 that it was seeing an unanticipated increase in procedures for Medicare Advantage patients, which it attributed to pent-up demand from the pandemic.

UnitedHealth’s comments were backed up on Friday by Humana, another major provider of Medicare Advantage plans, which said it was also seeing increased demand for certain procedures.

Managed care stocks were hit hard by the news. Humana (NYSE:HUM) has been the worst performer over the past five days, with shares falling 14%, while UnitedHealth (NYSE:UNH) dropped 7%, Elevance (NYSE:ELV) fell 6%, Centene (NYSE:CNC) and CVS Health (NYSE:CVS) both shed 5%, and Molina Healthcare slipped 2%. Cigna was the outlier (NYSE:CI), inching up 1%. In comparison, the S&P 500 (SP500) rose 2%.

According to a Wells Fargo note on June 16, the unexpected uptick means that Medicare Advantage plans for 2023/2024, could be mispriced, which in turn could pressure profits. The firm sees Humana being the most impacted, with 2024 earnings per share sliding 8.6%% from current estimates, while competitors would likewise see their earnings per share shaved, from 2.4% for Centene to 0.4% for Cigna.

While the impact on 2025 earnings should be “minimal,” analysts said they anticipate earnings per share could come in 6% lower for Humana. Cigna would see the least impact, with an estimated drop of only 0.3%.

Wells Fargo also said that they believe the discounting of the stocks is due to more than just miscalculating utilization of services.

“Setting utilization aside, we think these discounts are at least partially justified by overhangs from Medicaid redeterminations, PBM scrutiny, and the presidential election cycle,” the analysts wrote.

Wells Fargo also noted that managed care stocks have a track record of bouncing back. The bank identified eight times since the financial crisis that the S&P 500 MCO index has fallen below 90% of its 200-day moving average, which it hit on June 14. The index later gained on average 11.3% over the next month and 39.4% over the following 12 months, outperforming the S&P 500 by an average of 5.5% over the next month and 15.2% over the subsequent 12 months.

“While overhangs beyond utilization remain, buying pullbacks in Managed Care have generally worked historically,” the analysts added.