Turn America’s Healthcare Tsunami into Triple-Digit Gains

“All stocks are the same.”

At least, that’s what some investors think.

Once they identify an industry they want to invest in, say energy, they figure buying any stock would match the results of the industry.

But that couldn’t be further from the truth.

What they fail to see is that all stocks are not the same.

They view stocks as electronic blips on a screen.

In most cases, the only thing they know about the company is the name … and many times they don’t even know that.

A popular trader was asked on CNBC … “What does the company do?”

His response was not what you’d expect:

That’s why our approach stands out … it’s because so few see stocks for what they really are … pieces of a business. And that’s our edge. We’re competing against investors that have no clue what the business does!

Instead of focusing on the stock price, we focus on the fundamentals of the business.

Because at the end of the day, the stock price follows the growth of the business, not the other way around. And that gives us a huge edge over other investors.

Not all businesses are created equal. There are great, mediocre and terrible businesses in every industry.

So even if you invest in an industry with a strong tailwind — picking the wrong business, can greatly impact your performance.

Take the rideshare industry, for example.

Uber and Lyft both compete in the rideshare industry.

On the surface, there doesn’t seem to be much of a distinction between them. It’s just a simple app that lets you order rides and processes your payments.

In fact, most rideshare drivers drive for both companies depending on availability. I know I’ve got both of their apps installed on my phone, too.

But despite all their similarity, the performance of these two companies couldn’t be any more different. Uber dominates the industry with a 72% market share, while Lyft’s market share is only 28%.

Both companies recently reported their quarterly results.

Uber reported higher revenue, made a profit, and generated $430 million in free cash flow. The company said they just had its best quarter in history. Shares jumped 5% on the day they reported.

Lyft also reported earnings for the same period a few days later. Looking at the results, you’d have no idea they both were in the same business!

Lyft reported a $588 million loss. The stock price plunged more than 38% on the news.

Uber and Lyft have most of the market share for rideshare — yet one of them has 3X the market share of its competitor and made a profit, while the other is pretty close to being on life support.

So, what does Uber have that Lyft doesn’t?

It’s something that most investors never take the time to look at.

Yet, it’s one of the top three on my checklist … and that’s a rock-star CEO.

If you were investing in a private business as a passive investor, wouldn’t you spend considerable time checking out who was running the business on a day-to-day basis?

The CEO is the one that sets strategy, drives the business and allocates the capital. And a CEO could make all the difference in turning a business into a great one, or a terrible one.

One of the main reasons we recommended Uber to the portfolio on October 1, 2021, was because of Dara Khosrowshahi.

Khosrowshahi took over as Uber’s CEO in 2017. Prior to joining Uber, he was CEO of Expedia since August 2005. And under his leadership, bookings more than quadrupled … and its earnings more than doubled.

Expedia’s stock price had soared more than 600% — close to four times the S&P 500’s gain while Khosrowshahi was CEO.

So when Khosrowshahi became CEO at Uber, it certainly got my attention. The thing about great CEOs … they are able to replicate their success in other industries.

And that’s just what he’s done.

Since becoming CEO of Uber, he’s transformed the corporate culture, added Uber Eats, a food delivery business, and focused on generating free cash flow.

Over the past year, Uber’s share price is down just 1%, while Lyft’s is down more than 70%.

Uber’s story is just another in a long list of examples that management matters.

Uber and almost every business in our portfolio are proof of that.

We hope that Wall Street continues to think the management doesn’t mean much, and trades them indiscriminately. That creates a great opportunity for us.

And we found a tremendous opportunity, run by an outstanding CEO, in an industry most investors would think is boring.

The industry is health insurance.

As far as Wall Street is concerned, there’s nothing magical about the insurance business … even though there are massive differences in performance from one company to the next.

What’s more, the industry is driven by powerful tailwinds—in the form of an aging generation of 77 million baby boomers.

As folks like us keep growing older, healthcare spending in the US will continue to soar. It’s projected to reach $12 trillion by 2040 (from just $4.3 trillion today). When that happens, healthcare will account for more than 25% of America’s GDP!

The industry that will ride this tsunami trend will continue to be healthcare insurers.

But even with these strong tailwinds, health insurance is still a complicated business. One where success depends on pricing premiums correctly and developing a practical strategy for future growth — all while keeping costs in check.

The health insurance business we’re recommending returned 749% vs. the S&P 500 HealthCare Sector’s 436% from December 2009 to February 2023.

Like Uber, the CEO of this company has been making all the right moves, and we are happy to partner with him.

Cigna Corporation (NYSE: CI) is the fourth largest health insurance company in the U.S.

It has 190 million consumers — providing health insurance in 16 states.

The company is practically immune from inflation and recession risk, and benefits from rising interest rates on its investment portfolio. It generated $180 billion in revenue over the past year and it’s aggressively buying back shares.

Here’s a snapshot of why we like the company:

Cigna is the fourth largest health insurance provider nationally.

Cigna’s largest competitor is UnitedHealth, which we would love to own, but the stock price is not trading at a bargain price at this time.

The company’s second largest competitor is Elevance Health Inc. (NYSE: ELV) (previously named Anthem) which we already have in the portfolio. It’s up 66% since we added it in December 2019.

Cigna has two key business segments…

Evernorth is a portfolio of health services. It has two main services: Express Scripts Pharmacy Benefits Management (PBM). A PBM manages drug benefits for customers, filling prescriptions and completing the claims that go with them. The other service is Cigna’s Specialty Pharmacy Accredo.

These services consist of 13 order-processing home delivery and specialty pharmacies, 6 patient contact centers, 30 specialty dispensing pharmacies and 4 high-volume automated dispensing pharmacies located throughout the U.S.

The PBM dispenses approximately 1.6 billion prescriptions annually to members.

Specialty Pharmacy Accredo dispenses drugs for complex and rare diseases that require frequent dosing and intensive monitoring like Leukemia, Melanoma and hereditary angioedema. Through a network of 600 nurses and 15 centers, it serves 600,000 patients. Accredo has a 25% market share of the specialty pharmacy industry.

Evernorth also offers care-related services, including behavioral health, home care, wellness and telehealth.

Cigna Healthcare offers one of the largest health insurance plans for employers and Medicare members. It has more than 18 million members nationwide — including us here at Banyan Hill Publishing. Cigna is our health insurance provider.

Health insurance is a business that has a high barrier to entry, you can’t start a company in your garage or dorm room.

The health insurance industry is highly regulated at both the local and federal levels. And each state sets its own rules for insurance providers within that state.

Insurers focus on serving local markets and negotiate with local doctors to offer patients the lowest possible rates.

And while each insurer may have a low market share nationwide, only a few providers dominate the market within each state.

Profitable health insurers need to have a large membership base. The more members they have, the greater they can control their fixed costs.

Health insurers’ costs are already fixed, such as the software it uses to offer clients their services.

Serving one additional member is highly profitable for the company because it doesn’t require a lot of incremental costs. So, assuming the first million members cover all the company’s fixed overhead — such as office space, staff and computers — the next million members will bring more profit to the company’s bottom line.

Additionally, a large and growing membership base allows health insurers to negotiate with providers.

And negotiating leverage allows for lower medical costs per member, which filters down to lower premiums.

Cigna’s key insurance and PBM businesses benefit from these scale and network effects.

The PBM industry has consolidated to just three top players, controlling 80% of the market: CVS, Cigna and UnitedHealth Group. This is a sticky business, with customers staying around for a long time. Cigna has 95%+ customer retention in its PBM.

At the local level, health insurance is an oligopoly. That means a few major players tend to control each regional market.

Just think of it like your neighborhood drug store. There are probably dozens of drug stores in your county — but the vast majority are either a CVS or a Walgreens. That’s what oligopoly looks like in the real world.

In health insurance, in 92% of markets across the U.S., one insurer usually has the majority of the market share.

With that kind of control over the market, Cigna has a great deal of bargaining power to keep medical costs down. And keeping those costs down is a critical concern for their commercial insurance clients — the majority of which are self-funded.

Cigna’s also been expanding its services to better serve clients and stay one step ahead of an evolving marketplace.

The company’s new telehealth solutions, called MDLive, allows clients to meet with their doctor from home, using their smartphones, tablets or other connected devices. It’s more convenient than sitting around in the doctor’s waiting room, and it costs half as much as an in-person visit.

They’re now offering behavioral services in addition to traditional medical and health benefits. That includes health improvement programs, like wellness coaching and dieting assistance.

And by combining these proactive behavioral measures with traditional insurance, they’ve been able to save employer clients an additional $1,400 each year.

Cigna plans on driving growth from three areas: specialty pharmacy, Evernote Care services and the U.S. government.

These three growth drivers are currently generating about $70 billion in revenue. Cigna projects they can increase revenues to $120 billion by 2026. And looking over the projections, we are confident they’ll be able to achieve that goal.

And to get the job done and continue to push growth, Cigna has a rock-star CEO…

Cigna CEO David Cordani is an avid triathlete … which tells you everything you need to know about his sense of perseverance and dedication.

Olympic triathlons are grueling endurance races made up of almost a mile of swimming, followed by 25 miles of biking and a six-mile run to get across the finish line.

Just training for a triathlon can be a brutal experience, involving up to 15 hours of intense exercise each week. And that’s why I almost fell off my chair when I read that Cordani has competed in more than 125 triathlons.

Triathlons require unparalleled amounts of stamina, discipline and a long-term outlook. Those are the traits that also make for a great CEO, and the results show it…

Since he became CEO in 2009, Cigna’s revenue is up 10X, and earnings per share have soared by 6X.

Over the years, management has been aligned with shareholders. Since 2019, they have repurchased close to 20% of the company’s outstanding shares.

Wall Street is worried that Evernorth’s largest client is the U.S. Department of Defense.

They think that makes the business too concentrated — even though the DoD just signed a new contract extension through 2029.

The way we see it, Mr. Market is making a mountain out of an ant hill.

The DoD is with Evernorth for the next six years and 95% of its PBM customers stay with the company for the long term. So tell me again why Mr. Market is worried about this?

Another concern among investors is the rebate situation…

Rebates play a key factor in helping PBMs to lower drug costs for their end users. But there’s a lack of transparency for users when it comes to understanding those rebates. And there’s also some concern that the rebates could become the target of regulation in the future.

But in reality, those rebates only make up 5% of Cigna’s profits. So even if, which is a very low-probability event, rebates became an issue, it will not only impact Cigna, but all the other PBMs as well. Once again, Mr. Market hears a bump in the night, and thinks there’s a monster in the closet.

Both of Mr. Market’s concerns have put a cloud over the stock price … and we are thankful for that. Because Mr. Market’s misunderstanding is giving us the opportunity to buy a great business at an attractive price.

Alpha Market: Cigna has outperformed the S&P 500 HealthCare Sector by close to 2X. Health insurance is a complicated business with a high barrier to entry. Cigna is one of the leaders in an oligopoly industry.

Alpha Manager: Under CEO David Cordani’s strong leadership since 2009, Cigna’s revenue is up 10X, and earnings per share have soared by 6X.

Alpha Money: Mr. Market’s concerns about the DoD and PBM rebates are overblown. Both factors are low probability events and are weighing on the stock price. And that is good news for us.

While Mr. Market misses the boat, we have an opportunity with Cigna today.

Here’s how we see the company’s valuation…

Cigna’s stock is currently trading around $300.

Based on our research and the growing health care industry, 12% annual earnings growth over the next four years is highly probable.

In fact, over the past four years, earnings-per-share growth was 13%. So, we are being more conservative with our projections.

In four years, the earnings per share would be $36. With a projected price-to-earnings ratio of 16.5, and adding in dividends, that brings us to a target price of $600.

Action to take: Buy Cigna Corporation (NYSE: CI).

Last month, on January 12, I shared with you five of the biggest bargains in the Alpha Investor portfolio.

Lithia Motors (NYSE: LAD) is already starting to move higher, up 27% since the beginning of the year.

But the other four stocks are still holding steady, so Mr. Market is still giving you a great opportunity to buy them for bargain prices.

If you’re new or underinvested, we suggest you only buy stocks that are trading below their buy-up-to price.

That’s all for today! If you have any questions about this month’s recommendation, write us at [email protected].

Regards,

About Charles MizrahiUsing his Alpha-3 Approach, Charles Mizrahi is able to find money-making opportunities that other investors overlook. His 37-year career started as a floor trader on the New York Futures Exchange at just 20 years old. Soon afterward, he became a successful money manager and No. 1-performing market timer. Charles has managed money for everyone — from close family members and business owners to powerhouse investment banks. Now, he’s using his experience and insight to help Main Street Americans grow their wealth and beat Mr. Market to achieve their American dreams.

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