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Stock of the Week: Health Net Inc. (HNT)

By: Marc Chaikin
Posted: 8/4/2014 10:13:00 AM
Referenced Stocks: HNT;HCA;LPNT;CYH

Health Net Inc. (HNT) is an integrated managed health care firm which operates predominantly in California. The company is well-positioned to benefit from the expansion of Medicaid in California as a result of the Affordable Care Act.  HNT is due to report earnings before the market’s opening on Wed., August 6th. Last week’s Stock of the Week, Community Health Systems (CYH) reported better than expected earnings after the close on Thursday and spiked up 8% to a new 52 week high of 51.40 before succumbing to profit taking and closing at 47.24, down only $0.25 in a very bad week for the stock market.



Health care stocks like HCA Holdings(HCA) which also reported better than expected earnings this week, and LifePoint Hospitals (LPNT), which reported great earnings 2 weeks ago, have been the beneficiaries of increased business because of the Affordable Care Act. Health Net is expected to benefit in a similar fashion.

On July 24th HNT spiked up 8% to 45.61 on the heels of a Bank of America/Merrill Lynch upgrade from underperform to Buy. They put a price target of $59 on Health Net and spoke of a best case scenario valuation of $77. Merrill analyst Kevin Fischbeck cited better than expected profit margins on new business and fixed cost operating leverage as the basis for their bullish upgrade. They are looking for EPS of $3.10 in 2015 and $3.80 in 2016. Jeffries & Company also raised their price target on HNT recently in a general upgrade of many managed care companies ahead of 2nd quarter earnings reports.

Health Net’s focus on California is paying off as they are regarded as a partner with the state as a preferred health care provider. In their 1st quarter earnings report which sparked a big rally in the stock in spite of missing Wall Street estimates by 3 cents, Health Net talked of signing up 120,000 new members in the last 9 months of 2014.

Health Net has a strong cash position and its financial strength has resulted in aggressive share repurchases which are expected to continue. With HNT trading at less than 14x 2015 estimates, it is one of the best values in the strong managed care group.

If Wednesday’s earnings are positive, expect Health Net shares to retest the highs made in July. 



Very Bullish Chaikin Power Gauge rating for HNT)

Health Net has a very bullish Chaikin Power Gauge rating that is driven by very bullish Financial Metrics and across the board positive Expert sentiment. Analysts have been raising their estimates and ratings for HNT and insiders have been buyers of the stock. HNT is in the very strong Medical Care group which in turn is in the strong Health Care Sector (see XLV ETF). The company has a record of consistent earnings growth, and even when they disappointed Wall Street analysts in May, the stock traded higher.


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