The rise and fall of health care stocks is often hard to grasp, particularly in a world where the health care laws are creating some large potential winners and losers. Many investors guessed that health care stocks and insurance providers would be crushed under the Affordable Care Act (ACA), or Obamacare, but now some of the companies have seen their stocks hit new highs.

This week brought two incredible health care analyst calls from a broader sector call out of Sterne Agee — and two of the stocks were given upside averaging 50%.

Can health care stocks really rise 50% in this new environment? At least one analyst seems to think so. Sterne Agee’s Brian Wright published new Buy ratings on Molina Healthcare Inc. (NYSE: MOH) and on Health Net Inc. (NYSE: HNT), with an average upside potential of 50% or so.

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Molina Healthcare Inc. (NYSE: MOH) was started with a Buy rating and was given a $69 price target at Sterne Agee. This represents more than 50% implied upside from the prior $44.22 close, and shares ended the week at $44.58.

Wright said in his report that his upside is based on shares not fully reflecting normalized earnings power. He also believes that investors are effectively receiving post-2015 top-line growth for free.

Wright said:

Molina shares are currently valued at just 7.0-times a 2% net margin derived earnings per share based on 2015 premiums. We believe the discount is a function of two factors: 1) concern about Sovaldi and other high-cost specialty pharmaceuticals treating Hepatitis-C coming to market late in 2014 and 2) anchoring to recent trough net margin levels with investors less willing to contemplate cash earnings guidance. On a cash earnings basis, Molina shares are currently valued at just 12.0-times 2014 guidance (including $0.48 per share in stock-based compensation). … We believe Sovaldi costs can be absorbed in the near term given low levels of inpatient utilization, and we see additional Hepatitis-C therapies expected to launch in the fourth quarter of 2014 as of greater risk. However, we believe coverage and reimbursement policies developed by state Medicaid departments during 2014 will effectively address these additional launches.

Other gains include known contract awards/coverage expansions delivering over 30% top-line growth in 2014 and 2015. Also, favorable public exchange price positioning is likely to continue, representing an under-appreciated asset.

As far as the risks and the valuation, Wright said:

We see specialty pharmaceutical costs and Affordable Care Act fee tax gross-up as the two most likely risks to our thesis. Escalating specialty pharmaceutical costs not being offset by mitigating strategies in other cost categories or additional reimbursement and failure to be reimbursement for the non-deductibility of the ACA fee are the two most likely risks to our investment thesis. Our $69 price target is derived by applying the company’s historic 15x forward EPS multiple for our ’15 EPS estimate and adding back about $0.27 per share for the amortization of acquired intangible assets.

Health Net Inc. (NYSE: HNT) was also started with a Buy rating and given a $60 price target by Brian Wright at Sterne Agee. This was versus a $40.39 close, and $41.88 end of day trading (up over 2% on the call) on Friday. This is almost 50% implied upside and is based on it being the cheapest health plan in the sector relative to sustainable margin derived earnings per share in a post ACA world.

Wright said:

We see the earnings power of the organization in a post Affordable Care Act world in the $6-$7 range. While the company has not achieved sustainable consolidated margins in recent history, we believe Health Net is positioned to do just that as the business strategy was designed to fully benefit from the regulatory changes. Here we note that the company’s commercial margins for its tailored network products are better than its average commercial business, and the industry is heading more quickly than expected to much narrower networks.

Wright also sees an outsourcing agreement announcement to be able to deliver $150 million to $200 million in general and administrative savings over a three-year period adding nearly a $1.50 in earnings per share annually at the mid-point. Also, California Medicaid margins are said to be protected by supplemental funding agreement to offset any near-term volatility in medical cost pressures.

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Wright projects that Health Net is well positioned to maintain a significant (32%) market share in the public exchange in southern California, and that margin guidance could prove conservative. As far as a risk and valuation, Wright said:

We see the commercial risk pricing environment as the most important risk to our investment thesis. We believe that as the company sheds larger group membership that is less profitable than average and grows its tailored-network offerings, this should provide protection from a potentially more aggressive commercial pricing environment in the future. Our $60 price target is derived by applying a 15x forward P/E multiple times our $4.00 2015 EPS estimate that reflects over 20% organic top-line growth over the next several years.

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