Molina Healthcare: Best Buy in Managed Care

08/29/2017 2:52 am EST

Focus: HEALTHCARE

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

I consider Molina Healthcare (MOH) to be the only undervalued growth stock among the eight largest health insurers; none of the other health insurers meets my investment criteria, either due to high P/Es or moderate earnings growth, notes Crista Huff, editor of Cabot Undervalued Stocks Advisor.


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Last February I noted that the company had a huge earnings miss, with EPS bearing no resemblance to analysts' consensus earnings estimates.

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, Morgan Stanley changed its recommendation on MOH from underweight to overweight.

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, 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.  I’m adding Molina Healthcare to the "Buy Low Opportunities Portfolio" and rate the stock a Strong Buy.

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