Many investors are turning to insurance companies for some less-risky exposure to big demographic trends (including the graying of America). And given the membership expansion many are seeing from the Affordable Care Act -- also known as Obamacare -- it's no wonder. We asked some of our top analysts for their favorite insurance stocks for your portfolio.
Todd Campbell: No insurer embraced health care reform as actively as WellPoint (NYSE:ANTM) did last year. The company offered health insurance plans through exchanges in 14 states, allowing it to lock up more than 750,000 new members during the first open enrollment period. That gives WellPoint a critical head start heading into the second open enrollment period, which begins November 15th.
WellPoint will see a bit more competition from other national players this time around as insurers including UnitedHealth attempt to catch up. But since many of the members who signed up last season will simply roll over their coverage this year, WellPoint should remain a big beneficiary of exchange enrollment in 2015, too.
But it's not just the exchanges that make WellPoint an intriguing stock heading into fall. Medicaid expansion is also giving WellPoint a big boost.
The number of people enrolled in private Medicaid plans run by WellPoint climbed from 4.5 million last summer to 4.8 million this summer and that 8.4% membership increase led to WellPoint reporting a 7.4% pop in sales for its government business, which also includes Medicare programs, during the second quarter.
Assuming that WellPoint can keep a lid on costs (and so far it has), a combination of rising premium revenue from exchange enrollment and Medicaid expansion this winter could prove profit-friendly next year.
Matt Frankel: Personally, I would buy Genworth Financial (NYSE:GNW), which is the largest provider of long-term care insurance in the United States. Due to a disappointing quarterly report, shares have fallen by about 20% since late July, and the stock is starting to look extremely attractive, simply on a valuation basis.
Genworth's management is aggressively pursuing options that it feels will deliver great long-term value for its shareholders. For instance, the company intends to be fully compliant with the new Primary Mortgage Insurer Eligibility Requirements ahead of schedule in order to gain a competitive advantage in the segment, which is also a big source of Genworth's revenue.
However, Genworth still feels that long-term care insurance is going to be its big revenue driver in the future, estimating that 70% of the 78 million baby boomers between 50 and 68 years old will need some sort of long-term care but less than 10% of them currently have coverage.
And perhaps the most compelling reason to buy Genworth is that it trades for just 43% of its tangible book value, which signifies that investors anticipate some bumps in the road ahead. Still, Genworth is a compelling long-term value play that is hard to pass up right now.
Cheryl Swanson: Thanks to Obamacare, Medicaid enrollment is soaring, and Medicaid manager stocks are performing exceedingly well. And despite Centene Corporation (NYSE: CNC) bouncing off its all-time high of $83.32 on September 25, for investors looking beyond the short term, this stock's price still doesn't reflect its potential.
Last quarter, Centene increased its revenue guidance by $700 to $800 million for 2014. Centene also increased at-risk membership by 600,000 last quarter, a 23% gain compared to Q2 2013.
Premium and service revenue for the quarter climbed 49% to more than $3.7 billion. In July, the company began a five-year contract with Illinois, adding 100,000 new members. It also completed its 50% interest purchase of Spain-based health care management group Ribera Salad. While the $16 million investment was modest, CEO it signals diversity is part of this company's growth strategy.
Low profit margins are a notorious problem with companies that specialize in Medicaid, but two decades of Medicaid expertise make Centene unafraid to exit high-cost/high-risk markets to protect profits. It did so with Kentucky Medicaid last July. According to Barron's, Wall Street expects Centene to increase profits at an average pace of 17% over the next five years.
With the ACA still a long way from full implementation, this stock could easily regain its momentum and move higher.
Cheryl Swanson owns shares of WellPoint. Matthew Frankel and Todd Campbell have no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.