Every election produces winners and losers, and they're not limited to candidates. Certain stocks can also move higher or lower based on election outcomes.
What happens when election results are as muddled as they've been in 2020? Some stocks win even amid -- or even because of -- uncertainty. Here are three stocks that soared after Election Day.
Three big movers, one common denominator
Shares of Cigna (CI) vaulted nearly 15% higher on Wednesday following the U.S. election on Tuesday. Anthem (ELV -0.93%) and UnitedHealth Group (UNH -0.35%) weren't too far behind, with gains of 12% and 10%, respectively.
You probably noticed a glaring common denominator for these three: They're all big health insurers. It definitely wasn't a coincidence that health insurance stocks jumped as election outcomes emerged.
At the time of this writing, Democrats appeared to be in a solid position to retain control of the U.S. House of Representatives, while Republicans seemed to be on track to hold onto a majority in the Senate. The winner in the presidential race was still uncertain.
However, former vice president Joe Biden claimed a lead in the popular vote and in the Electoral College. He also appeared to be ahead in the votes in enough battleground states to win in the Electoral College, assuming he held onto the lead after all votes are counted.
Why is this scenario good news for health insurers? For one thing, a divided government lowers the likelihood of huge changes that could negatively impact health insurance companies. Also, assuming Biden hangs on and ultimately wins the presidential race, he would probably pursue his agenda of strengthening Obamacare. That could present unique opportunities for health insurers with significant Medicaid operations.
Are they buys now?
Some votes are still being counted. There's always a chance that the election outcomes could be different in the end than they look now. But if the two major political parties split control of the U.S. Congress and Biden wins, are Anthem, Cigna, and UnitedHealth Group good picks to buy?
My view is that the outlook should be favorable for the health insurance industry. Instead of loading up on three insurance-focused healthcare stocks, though, I think a better move would be to select the strongest company in the industry and buy its shares. That company is UnitedHealth Group, in my opinion.
UnitedHealth Group is by far the biggest health insurer; its $289 billion market cap is more than four times greater than the respective market caps of Anthem and Cigna. It also generates significantly more revenue and profits than either of its two smaller rivals.
I think being the biggest gives UnitedHealth Group certain advantages. In particular, the company's size provides some incremental economies of scale. However, the main reason I think it's the best stock in the group isn't its health insurance business. Instead, it's the company's Optum segment.
Optum includes three different businesses: OptumHealth, OptumInsight, and OptumRx. OptumHealth provides care, including behavioral health and management of chronic conditions. OptumInsight provides healthcare technology services. OptumRx provides pharmacy benefits management services.
In the third quarter of 2020, Optum generated greater operating earnings than UnitedHealth Group's health insurance business while bringing in only 70% as much revenue as the health insurance business did. Optum also stands out as the biggest growth driver for the company.
I also fully expect that UnitedHealth Group will increase its focus on the telehealth market in the near future. There has been speculation that the company might acquire telehealth services provider Amwell. Even if that doesn't happen, UnitedHealth Group CEO Dan Wichmann hinted at the potential for the company to move more aggressively into telehealth during the company's Q3 conference call.
My take is that UnitedHealth Group is a good stock to buy now that the election results likely point to stability for health insurers. However, I think the company's prospects would still be solid even if the results turn out differently.