Stuck for fresh investing inspiration? You’re not alone. After the stock market’s record-breaking performance in 2019, plenty of uncertainty lingers on Wall Street as we go forward into 2020. The U.S. presidential election coupled with new fears related to the spread of the coronavirus, which pushed the S&P 500 down 1.6% yesterday, have driven concerns that 2020 will see its fair share of volatility.
Against this backdrop, investment banking giant Goldman Sachs published a report containing valuable insights. Highlighting the healthcare services sector in particular, the firm notes that while it anticipates fourth quarter results will fall in line with expectations, the key area to watch is 2020 guidance.
“We believe 2020 outlooks will matter more, and see some potential for these updates to be overshadowed by political developments – speciﬁcally, upcoming Democratic primaries, where investors seem braced for a win (or two) by Senator Sanders, a Democratic candidate who supports the elimination of private health insurance,” analyst Stephen Tanal explained.
To this end, the analyst argues that any weakness in the firm’s Buy-rated managed care organizations (MCOs) will present investors with an attractive entry point.
Bearing this in mind, we used TipRanks Stock Comparison tool to take a closer look at 3 of Goldman Sachs’ stock picks in order to determine the strength of these potential portfolio additions. Based on the information provided by the platform, each of the names has also garnered substantial support from other analysts, enough to earn a “Strong Buy” consensus rating.
Humana Inc. (HUM)
Healthcare is at the core of everything for medical insurance company Humana, whose goal is to not only improve healthcare, but also make it more accessible. While the company is off to a rocky start in 2020, Goldman Sachs believes several positives are in store.
Tanal points to the permanent repeal of the health insurance fee (HIF), which will go into effect in 2021, as standing to benefit HUM. According to the analyst, the repeal “will have a disproportionately positive impact on HUM’s earnings given its group-high exposure to Medicare Advantage.” He added, “We expect out-year estimates to rise post 4Q and in the coming n months, as it appears that most sell side analysts have undershot the likely beneﬁt of the repeal of the HIF.”
Even though Tanal acknowledges that the company could face headwinds related to higher reimbursement rates for dialysis patients on Medicare Advantage plans, he estimates that the repeal will cover the headwind by a double-digit multiple.
Adding to the good news, Humana’s fourth quarter results are expected to be favorable. “We are comfortable with 4Q, too. At our recent healthcare CEO conference, HUM’s CEO noted that investors should not be overly concerned by the potential impact of the most widespread ﬂu season in years,” Tanal wrote.
With the stock trading at a 9% discount to the S&P 500, it seals the deal for Tanal. Given all that HUM has going for it, the analyst not only kept the rating as a Buy, but also added the name to the firm’s Conviction List. In addition, the $425 price target implies that shares could climb 23% higher in the next twelve months. (To watch Tanal’s track record, click here)
Turning now to the rest of the Street, analysts are generally on board with HUM. 14 Buy ratings and 4 Holds assigned in the last three months add up to a Strong Buy Street consensus. Based on the $392.56 average price target, the upside potential lands at 13%. (See Humana stock analysis on TipRanks)
Cigna Corporation (CI)
Another health insurance name, Cigna’s approach has integrated the physical, emotional, financial, social and environmental aspects of health and well-being. Even after a solid six-month performance in which 16% was ticked on to the share price, Tanal thinks that there’s still plenty of room for CI to grow.
As 2019 marked the first full year since its acquisition of Express Scripts, the Goldman Sachs analyst is expecting the company to post strong fourth quarter numbers. According to his projections, 2020 adjusted EPS guidance could fall within the range of $18.05 to $18.55. This figure “should leave room for ‘beat and raise’ quarters, in part because guidance typically excludes future capital deployment and any favorable prior period development.”
The analyst cites three possible catalysts that could propel shares higher in 2020. First and foremost, the ramp of synergies from Express Scripts could have a significant impact, with the year-over-year step-up previously expected to be $273 million, or 3% of the midpoint of current 2019 guidance. On top of this, he points out that its deleveraging could generate a $154 million step-down in interest expense year-over-year and the earn-back of stranded costs related to the Anthem transition in 2019 stand to add $100 million to earnings.
Tanal added, “Between the specialty launch pipeline, the Prime deal, the HIF repeal, proposed incremental capital deployment post the announced divestiture of the Group Disability and Life business and bigger than expected buybacks in 1Q-3Q 2019, we see a clear path to 2021 targeted adjusted EPS of $20 to $21.”
In line with his optimistic take on CI, the analyst maintained a Buy rating and $245 price target. Should the target be met, shares could be in for a 24% twelve-month gain.
What do other analysts have to say? As it turns out, the rest of the Street generally sides with the bulls. A Strong Buy consensus rating breaks down into 10 Buys, 1 Hold and 1 Sell. In addition, the $232.75 average price target indicates 16% upside potential. (See Cigna stock analysis on TipRanks)
HCA Healthcare Inc. (HCA)
Focusing on a different segment of the healthcare space, HCA operates hundreds of hospitals and clinics located throughout the U.S. Thanks to its performance exiting the third quarter, the Goldman Sachs analyst has high hopes for the healthcare name.
Despite the investor concern ahead of its fourth quarter earnings release due to the volatility of the fundamentals in the ﬁrst three quarters of 2019, Tanal notes that his bullish thesis is very much intact. Out of all the hospital and dialysis stocks he covers, HCA lands among the top two names expected to deliver the most potential upside compared to the adjusted EBITDA consensus estimate. Same-facility adjusted upside could be the source of the beat.
For HCA, management’s outlook for 2020 will be essential, in the analyst’s view. He thinks the full year 2020 guidance will come in at around $10,260 million to $10,540 million, versus the Street’s $10,354 million forecast.
“Labor costs are likely to be a focus heading into 2020 given continued robust job growth and low unemployment levels. Further, we will also be interested in any updated commentary on not-for-proﬁt M&A opportunities, as recent acquisitions such as North Carolina-based Mission Health have delivered strong performance vs. the company’s initial expectations,” Tanal wrote.
It also doesn’t hurt that admissions could see an increase as a result of the current flu season. It should come as no surprise, then, that the Goldman Sachs analyst reiterated his bullish call and $165 price target. This target conveys his confidence in HCA’s ability to surge 17% in the coming twelve months.
Looking at the consensus breakdown, it appears that other analysts are on the same page. With 12 Buys compared to a single Hold, the word on the Street is that HCA is a Strong Buy. At $161.45, the average price target brings the potential twelve-month gain to 14%. (See HCA Healthcare stock analysis on TipRanks)