Three health insurance stocks hit all-time highs recently. Aetna (AET), Humana (HUM -3.66%), and WellCare Health Plans (WCG) are all significantly outperforming the S&P 500 so far in 2017, and all three stocks now trade at their highest levels ever.
Wall Street took the failure of the planned merger of Aetna and Humana in stride. WellCare continued to benefit from its strong Medicare and Medicaid businesses. With the stocks at record-high levels, should investors buy, sell, or hold?
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Buy
Aetna, Humana, and WellCare increased their full-year 2017 earnings guidance as a result of solid first-quarter results. While total revenue was down year over year for Aetna and Humana, that was actually good news. The declines stemmed in large part from both companies scaling back participation in the Obamacare exchanges. Although that negatively impacted revenue, it helped improve profitability.
The good news for Aetna and Humana is that the positive impact of existing Obamacare exchanges should continue. This gives investors a reason to buy the stocks. For WellCare, completed acquisitions of Universal American and Phoenix Health Plan as well as the company's expanded Medicaid business in Missouri should drive revenue and earnings higher.
Aging demographic trends serve as another key argument for buying any of these stocks. Medicare membership should increase as Americans grow older. Aetna and Humana are two of the top Medicare stocks on the market, while Medicare is the largest source of revenue for WellCare.
Sell
There are two major reasons investors should consider selling these health insurance stocks. The first is valuation. That's especially the case for WellCare. Its stock trades at 29 times trailing-12-month earnings and 22 times expected earnings.
Aetna's trailing-12-month price-to-earnings ratio is 45, while its forward earnings multiple is a much lower 15. Humana stock trades at 24 times trailing-12-month earnings and 19 times expected earnings. Although the two companies' forward multiples aren't nearly as high as WellCare's, they're both still near all-time high valuations.
The second reason for selling these three stocks relates to uncertainty for Medicaid. If Trumpcare becomes a reality, the Medicaid expansion spurred by Obamacare will disappear. Aetna, Humana, and WellCare derive significant revenue from their Medicaid operations. There's a good case to be made for selling the health insurers' stocks now at their all-time highs and lock in nice profits.
Hold
The argument for holding shares (or holding off on buying shares) of these health insurers is a mixture of the reasons to buy and the reasons to sell. With Aetna, Humana, and WellCare forecasting stronger performances in 2017, there's a reasonable chance that the stocks can move even higher.
However, valuations are high and there is considerably uncertainty over what will happen regarding healthcare reform. Investors might want to wait for the dust to settle before committing to either buying or selling Aetna, Humana, or WellCare stock.
Best approach
My view is that investors should take a long-term perspective for each of these stocks. That means placing higher importance to the likely growth in Medicare, a trend that will benefit Aetna, Humana, and WellCare. Over the long run, this should be a more important factor than what happens in the near term with Trumpcare. Based on this reasoning, I think these stocks are still ones to consider buying.
However, I also think that valuation should be taken into account. Aetna has the most attractive forward earnings multiple. Also, Aetna ranks as one of the best Medicare dividend stocks with a current yield of 1.35% versus 0.59% for Humana and no dividend for WellCare. As a result of these two factors, my view is that if you only chose one of these stocks to buy, Aetna would be the best bet.
