Five analysts have increased their EPS estimates for this health benefits company in the past 30 days.
Anthem, Inc. (ANTM)
From Dow Theory Forecasts
Second-guessing such rallies is what good investors do. But those arguing that the market is ignoring reality are missing the plot. The next time you hear a pundit say the rally must be folly given the state of the economy, consider these points:
➤ The stock market is not the economy. The worst devastation from the lockdown has been seen in small stores and restaurants, not the bigger companies represented on the stock market.
➤ Investors look forward, but economic data and earnings reports show what has happened in the past. The stock market is discounting what is likely to happen over the next 20 or 30 years, and stocks tend to perform well when the economy is in recession.
➤ Stock prices reflect expectations for future earnings—and the discount rate used to discount those earnings. Partly because of the Federal Reserve’s massive efforts to add liquidity to the bond market, investors are discounting risky assets with a lower discount rate. The yield spread between high-yield corporate bonds and Treasury bonds has narrowed dramatically since mid-May, causing junk-bond prices to surge.
➤ The broad market is advancing. The S&P 1500 advance-decline line, a running total of advancing minus declining stocks, recently hit its highest level since March. So did advance-decline lines for stocks in the S&P Midcap 400 and S&P SmallCap 600.
➤ Cyclical stocks tied to efforts to reopen the economy have paced the market in recent weeks, suggesting investors see things getting back to normal. The market is no longer relying solely on tech stocks and defensive groups like consumer staples. Groups that tend to do well in the early stages of economic recovery, including small stocks, homebuilders, transportation, semiconductors, and machinery, have surged since mid-May.
Anthem is being added to the Buy and Long-Term Buy lists. Anthem has grown its medical membership 3% over the past year to 42.1 million, with 73% on commercial plans, 18% on Medicaid, 5% on Medicare, and 4% on plans for federal workers. Sales jumped 21% in the March quarter, following 16% growth in the December quarter.
Recent growth is benefiting from Anthem rolling out its own pharmacy benefit manager last year. At 13 times estimated 2020 earnings, the shares trade 31% below the median health insurance stock in the S&P 1500 Index. The stock earns an Overall rank of 98, with both sector-specific ranks also exceeding 95. Anthem was previously rated A (above average).
Richard Moroney, CFA, Dow Theory Forecasts, dowtheory.com, 800-233-5922, June 8, 2020