Our first recommendation today is a company that IPO’d in July 2014. Institutions have recently purchased almost 7 million shares, seven out of eight analysts have a “buy” rating on the stock, and three have increased their earnings estimates in the past 30 days. The second idea is a trading pick for a broad index ETF.
HealthEquity (HQY)
from Cabot Stock of the Month
Recent months have been rough on drug stocks, thanks in part to Hillary Clinton’s criticism of high drug prices. But there’s one sector of the health care business that’s thriving, and will continue to thrive, and that’s the part that involves (pardon my cynicism) the act of pushing paper around to determine who eventually pays the bill.
Historically, insurance companies have been great conservative investments because of their lock on this business; the way they seized power from doctors and hospitals over the past fifty years was impressive.
But the Affordable Care Act shuffled the deck a bit. And as the government has taken more of the power, and corporations have worked to shed health care responsibilities and costs, the result has been a growing demand for tax-advantaged health care plans like Flexible Spending Accounts and Health Savings Accounts.
Flexible Spending Accounts, in brief, enable account-holders to spend their own money on health care and bypass payroll taxes in the process. Health savings accounts (HSAs) enable account-holders to save pre-tax dollars and watch them grow, again while escaping taxation, and use the account to pay health care expenses. Also available are Health Reimbursement Arrangements and Dependent Care Reimbursement Accounts, which provide just what they say, also on a pre-tax basis.
These are all great plans, but they all need someone to administer them, which is where HealthEquity (HQY) comes in. HealthEquity is one of the leading companies in this business, managing more than 1.5 million HSAs for 70 health plan partners and employees at approximately 27,000 companies across the U.S.
The company charges a small management fee for each account, and those fees add up. In the latest quarter, 48% of revenues came from account fees, 30% came from custodial fees and 22% came from card fees, which is the fastest-growing segment of the business (consumers love paying with plastic).
Founded in 2002, the company grew revenues 35% in 2014 and between 40% and 50% in each of the past four quarters. And just last week, HealthEquity announced that it would acquire 170,000 health savings accounts from The Bancorp (which is getting out of the business). HealthEquity is paying $34.4 million for the accounts, which hold roughly $400 million in deposits (that’s an average of $2,353 per account). By comparison, prior to the acquisition, HealthEquity had $2.6 billion in 1.5 million accounts, for an average of $1,733 per account, so the company is moving in the right direction. Long-term, the number of HSAs should triple by 2020, a big wind at the company’s back.
Earnings have been consistently positive, and analysts are looking for earnings growth of 67% this year and 43% in 2016, so this is definitely a growth company. Yet it’s also a conservative company, because the business model is so much like that of those insurance companies that have dominated health care in recent decades: collect money and grow it, while charging fees. The difference is that, unlike insurance companies, HealthEquity has no risk of unexpected losses.
As to the stock, it came public in July 2014 at 14, and has been in a generally upward trend since, marked by a few major corrections. Most recently, we saw the late-August market panic take the stock down to 25, and a selloff last week take it down near 27, where the stock’s 200-day moving average provided support. The acquisition announcement came the next day, and I feel confident buying here, with downside limited and upside not.
Timothy Lutts, Cabot Stock of the Month, www.cabot.net, 978-745-5532, October 27, 2015