The next Federal Reserve Open Market Committee meeting is set for July 30-31, where they will decide whether or not to cut interest rates. The market assumes a 100% probability that the Fed cuts rates by at least a quarter point, according to analysts.
Barclays BCS recently ran a deep analysis of performance by different sectors following rate cuts. It found that the performance of most sectors depends on why the Fed lowered rates, with possibilities being an economic soft-patch or a full-blown recession. There is, however, one sector that consistently performs well.
Health-care stocks outperform the market by about 7% in the nine months trailing a rate cut, research shows. This is likely due to health care’s consistent revenue, regardless of economic climate, and relatively large dividends.
Below are three health-care stocks that could rise above the market following the expected rate cut.
1. Magellan Health MGLN
Magellan is a for-profit managed health-care provider that focuses on special populations, complete pharmacy benefits, and other specialty areas. It is currently headquartered in Scottsdale, Arizona and has roughly 220,000 health-care providers in its network.
Magellan is up 25.8% YTD, outperforming the broader health-care industry by 30.9%. With a forward P/E of 16.25x, this firm is valued on par with the medical care industry average of 15.46x. Analysts predict a strong year for MGLN, with 59.35% projected earnings growth, compared to a predicted 21.90% earnings growth for the industry.
News broke last month of a possible saleto private-equity firm Centerbridge Partners LLC. There is no guarantee a deal goes through, but if it does, it could be as early as the end of July. If the deal pays a premium over market valuation, the stock will likely jump and benefit sharehodlers.
Magellan currently holds a Zacks Rank #1 (Strong Buy) with Style Scores of an “A” for both Value and Growth. The potential rate cut and possible acquisition could both serve to boost MGLN’s price in the coming weeks, so keep an eye on this stock.
2. UnitedHealth Group UNH
UnitedHealth is a for-profit managed health care company based in Minnetonka, Minnesota that offers health-care products and insurances services. It is the largest health-care company in the world, with $226.2 billion in revenue for 2018 and 115 million customers.
UnitedHealth is up 4.5% YTD, outperforming the industry by 9.6%. It has a forward P/E of 15.75x, very close to the industry average. Our Zacks Consensus Estimates project steady year-over-year growth of 10.51% this quarter and 11.14% next quarter.
Looking forward, UnitedHealth is pursuing an exciting opportunity using blockchain technology. The health-care system currently spends an estimated $2.1 billion a year acquiring and maintaining provider data, and UNH is looking to cut this figure down. UnitedHealth is currently in the midst of a trial run of a blockchain-based shared directory so that provider information can be easily updated to all insurers at once. These large cost-cutting measures could eventually help boost earnings.
UnitedHealth currently holds a Zacks Rank #2 (Buy), with analysts recently increasing earnings estimates for fiscal 2019 and 2020. As one of the largest health insurance players, this stock could be a strong performer after a rate cut.
3. Molina Healthcare MOH
Molina is a managed health-care company headquartered in Long Beach, California. It arranges the delivery of health-care services to individuals and families who receive their care through Medicaid, Medicare, and other government-funded programs and has a market cap of $8.63 billion.
Molina Healthcare stock is up 22.7% YTD, beating its industry by 27.7%. It has a forward P/E of 12.1x, compared to the industry’s 15.5x. This means the stock is likely trading at a discount, as it used to be consistently valued at a higher multiple. Analysts project a 13.78% increase for this quarter’s earnings compared to the year-ago period.
Molina holds a Zacks Rank #1 (Strong Buy) at the moment and an “A” for Value and Momentum in Style Scores system. MOH has a strong recent history of earnings reports, with last quarter earnings coming in at $3.04 on an estimate of $2.41, representing a 26.1% beat. Over the past 4 quarters, Molina has beat estimates by an average of 88.17%.
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