J.P. Morgan Highlights Health Care Stocks to Buy as Obamacare Kicks In

In a new research report, J.P. Morgan & Co. (NYSE: JPM) has updated its proprietary health care reform model that analyzes the U.S. insurance landscape by state and by health coverage segment, including assumptions on the pace of coverage expansion, opt-in/out decisions on Medicaid expansion, exchange market share and pricing/margins, and the magnitude of employer dumping. Through this thorough deep-dive, the analysts have come up with a list of stocks to buy, and they even are raising some of their price targets.

Aetna Inc. (NYSE: AET) operates in three segments: Healthcare, Group Insurance and Large Case Pensions. The company recently acquired Coventry Health Care, which is a diversified managed health care company that offers a full portfolio of risk and fee-based products, including Medicare Advantage and Medicare Part D programs, Medicaid managed care plans, group and individual health insurance, coverage for specialty services such as workers compensation, and network rental services. J.P. Morgan is bullish on the acquisition and on Aetna. The firm raises its price target from $71 to $74. The Thomson/First Call estimate for the stock is $72. Investors are paid a 1.2% dividend.

Cigna Corp.‘s (NYSE: CI) solid business momentum and strong Medicare Advantage and International segment positioning continue to leave a positive risk-reward level, with the stock trading at a low 9.5 times 2014 earnings per share estimates. The J.P. Morgan analysts particularly like the name, given Cigna’s below-average exposure to the 2014 health care reform uncertainty. They raise their price target from $78 to $87. The consensus price target for the stock is $85. Investors are paid a tiny 0.1% dividend.

Community Health Systems Inc. (NYSE: CYH), like other hospital stocks, had a tremendous year going until mid-summer, when the stock started to sell off hard. J.P Morgan’s Community Health thesis is predicated on coverage expansion under reform providing a substantial boost in 2014 and a large asset base providing geographic diversification and scale advantages. J.P Morgan analysts move their price target from $52 to $56. The consensus price objective for the stock is $52.

HCA Holdings Inc. (NYSE: HCA) is another one of the top hospital names to buy on the J.P. Morgan list. The analysts believe HCA has scale advantages as the largest private hospital operator in the United States and is diversified geographically. The company also benefits from local market density, with the number one or number two market share in most of its local markets. They also view the company’s experienced management team as a strong positive. The price target is moved from $43 to $50. The consensus target is $47.

Humana Inc. (NYSE: HUM) has a unique earnings profile and is the closest thing in the space to a Medicare Advantage pure play, with 60% of operating earnings levered to this segment and a strong market position. Future growth should come from a combination of baby boomers (turning 65 at the rate of 8,000 per day for the next 18 years) and continued market share gains and potential shifts from employers to Medicare. J.P. Morgan has a $110 price target for the stock, while consensus is pegged lower at $96. Investors are paid a 1.1% dividend.

UnitedHealth Group Inc. (NYSE: UNH) is best positioned in the J.P. Morgan coverage universe from a benefit standpoint, heading into reform with only 13% of membership at risk by its definition. When coupled with the company’s best-in-class market positions across its Benefits segment and the differentiated growth profile of the company’s Optum segment, J.P. Morgan likes the name and ups its price target from $70 to $80. The consensus target for the stock is $79.50, and investors are paid a 1.6% dividend.

Universal Health Services Inc. (NYSE: UHS) is well liked at J.P. Morgan, as coverage expansion under reform provides a substantial boost in 2014. The company’s focus is on behavioral health, which is in a comparatively more attractive position over acute care, the differentiating degree of diversification with behavioral health providers and its market leadership within acute care facilities in high-growth areas. The bottom line is mental health is a growing field. The J.P. Morgan target is raised from $74 to $86.

The bottom line for investors, despite the sky-is-falling rhetoric, is companies that provide health care coverage and hospitals will remain and get paid. Those that are the best positioned, and select the best states to participate in the exchange, or locate their hospitals, most likely will be the ultimate big winners in the years to come.