Wall Street believes this healthcare stock is going to produce double-digit growth over the next five years. The shares were recently upgraded by Morgan Stanley to ‘Overweight’.
Molina Healthcare, Inc. (MOH)
From Cabot Undervalued Stocks Advisor
Today I’m adding Molina Healthcare, Inc. (MOH) to the Buy Low Opportunities Portfolio. Molina is a managed healthcare operator. I researched health insurance companies earlier this month for a feature in Wall Street’s BEST Daily, which I then pointed out in the August 15 weekly update of Cabot Undervalued Stocks Advisor.
Molina is the only undervalued growth stock among the eight largest health insurers. None of the other seven health insurers meets my investment criteria, either due to high P/Es or moderate earnings growth.
MOH had been featured in Cabot Undervalued Stocks Advisor in January and February 2017 until the fourth quarter 2016 earnings release prompted me to sell the stock. At that time, I wrote:
“The company had a huge earnings miss, with EPS bearing no resemblance to analysts’ consensus earnings estimates. The portion of Molina’s health insurance business that is devoted to the Affordable Care Act (ACA) suffered greatly from a variety of costly problems, including extremely high-risk transfer payments, and non-payment of $90,000,000 owed to Molina by the U.S. government. Molina’s non-ACA business actually performed quite well, and enrollment growth exceeded expectations.”
I was apparently not the only investment professional who was alarmed at fourth quarter results, because on May 2, the company announced big changes in corporate leadership. The CEO and CFO—who both happen to go by the surname of Molina—were ousted and experienced company and board executives were named in new leadership positions while the company searches for a permanent CEO.
New Chairman of the Board, Dale Wolf, immediately began instituting additional changes at the company, including a restructuring plan that focuses on multi-year cost savings, improved competitiveness in the Medicaid market, and presumably, a better handle on cash flow. The market is now showing confidence in Mr. Wolf’s leadership; thus, it’s time to make a decision on whether to own the stock.
The company is expected to grow earnings per share (EPS) by 360% and 32.6% in 2017 and 2018. The corresponding P/Es are 25.5 and 19.2, which are nicely below the earnings growth rates. The stock does not pay a dividend, and the debt levels are fair—not low and not high.
After selling MOH in February, I ignored the stock until this month, when I became quite impressed with the revised earnings outlook. Then today, Morgan Stanley changed its recommendation on MOH from underweight to overweight, causing the share price to pop this morning.
In a similar situation, WellCare Health Plans (WCG) fired their CEO in 2013 and embarked on an extended CEO search. I first recommended the stock in January 2015, once the financial turnaround had commenced. WCG was featured in Cabot Undervalued Stocks Advisor from October 2015 through November 2016, and delivered a 59.4% capital gain. I eventually sold WCG because the stock became distinctly overvalued.
I believe the share price on MOH is now completely out of the woods, and ready to begin marching back to its all-time high in the low 80’s, from the summer of 2015. My recommendation is that traders and growth investors buy MOH today, and don’t fret that you might have missed a couple of dollars on the share price. The worst is over, barring some very bad news or a big stock market correction. My price target is 80, giving new investors a potential 33% capital gain. Strong Buy.
Crista Huff, Cabot Undervalued Stocks Advisor, www.cabotwealth.com, 978-745-5532, August 17, 2017