Jeff D. Opdyke

Prepare yourself to pony up more for health insurance next year. Bad news for your wallet, good news for your portfolio – assuming you own the right stock.

America’s health insurance companies entered 2020 just like any other year – with a certain set of expectations based on actuarial tables and their own historical statistics. And then along came the microbe to throw 2020 into unimagined disarray.

Lloyd’s of London now estimates the pandemic will cost the global health insurance industry more than $200 billion. Which helps explain why insurance stocks such as Cigna (CI), Humana (HUM), Anthem (ANTM) and others have struggled a good bit this year. All are down.

But this is one of those moments where Wall Street’s short-term myopia represents a buying opportunity for those with a longer-term take on investing.

See, the insurance industry is already pressing Congress for relief by pushing for a re-insurance system that would backstop the industry to help cover outsized medical claims tied to the pandemic. That would reduce the impact Covid has on insurer profits.

If that doesn’t work, well, then, insurers will do what insurers always do: They’ll raise consumer premiums going int 2021 to recoup their costs. (in fact, they’ll probably do that even if they do get some help from Congress). That’s potentially a boon for insurers next year and beyond.

All of which means snapping up uber-cheap health insurance companies now could prove a very profitable way to play the end of the coronavirus.

We could consider lots of health-insurance stocks as potential investments, but the one that stands out is CVS Health (CVS), a unique combination of health insurer (it owns Aetna), pharmacy-benefits manager (Caremark) and retail pharmacy with is namesake brand.

During the lockdown, Americans curtailed elective surgeries and stopped in-store shopping. That obviously hit CVS’s retail outlets in terms of prescription purchases and general merchandise sales. That’s temporary, however. When life returns to some semblance of normal, delayed elective surgeries will be back on the schedule … and consumers will be walking the aisles of CVS to pick up prescriptions and over-the-counter meds, toiletries, snacks, and whatnot.

Caremark, meanwhile, as one of the largest pharmacy-benefits managers in the country, is in strong position to fight for lower drug prices for its members. That capacity will help CVS compete for health-insurance contracts with employers and governments as healthcare prices rise in the pandemic’s wake.

And, finally, there’s Aetna, one of America’s largest health insurers.

One of the more insidious impacts of the coronavirus is that millions more Americans are now uninsured because Covid has shuttered so many business. The upshot is a rise in the number of people falling onto Medicaid and Medicare rolls to obtain health insurance. That plays directly into CVS’s strength. The company’s Government Services division caters to 12.5 million Medicare recipients and 21 million who receive Medicaid, making CVS an industry leader. As more American’s end up on Medicare/Medicaid rolls, CVS benefits.

The thing is, lots of those people falling onto Medicaid because they lost insurance in the pandemic are younger and healthier, meaning they’re not likely to be as much of a drain on Aetna as are older Americans with a greater number illnesses and ailments. That would be a big win for CVS.

Better yet, it’s not like CVS is a traditional retailer dependent on consumer whims and the latest trends. People have to buy prescriptions. People need over-the-counter meds and everyday basics. Yes, some of that spending can happen at supermarkets. But if you’re already at a CVS to grab a prescription, you’re just as likely to pick up everything else you need, from makeup to shampoo to breakfast cereal. So, to a large degree, CVS is a recession- and Covid-resistant retailer.

Of course, the Street doesn’t see it this way at the moment. It’s focus is on the short-term issues all health-insurers face. Which explains when the share fell to just over $52 at the March lows from just over $74 at the start of the year. Today, CVS stock, at $59.50 hasn’t really moved much off those Covid lows, and remain down 20% of the year.

That just means the stock is unreasonably cheap, particularly relative to the quality of the company a post-Covid future likely to rising premiums and a return to normalcy in the pharmacy business. Forward P/E: 8.2. Price-to-sales and price-to-book are 0.3 and 1.2, respectively. Plus a plump dividend yield of nearly 3.4% in a zero-rate world.

Unloved and undervalued CVS might just be the perfect prescription for investing in a post-Covid world.


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