NEW YORK (TheStreet) -- UnitedHealth (UNH), Anthem (ANTM), Aetna (AET), Humana (HUM), Cigna (CI), are involved in a buzz of merger and acquisition activity, as the health insurance industry is responding to the aftershocks of the Affordable Care Act. One of the aftershocks was the consolidation of hospitals as health care providers. Last year, there were 95 mergers involving regional hospitals. Left alone, these hospitals will have too much clout in setting prices of health care. To counter that clout, the market is preparing and applauding the merger of health insurance companies, which pay the fees for health care provided by the hospitals.
The possible spoiler of all these merger talks is a pending Supreme Court decision expected in June 2015 that may deal a death blow to Affordable Care Act. However, judging by the increase in the stock prices of both acquirers and acquirees, the market may well expect that the administration will get a favorable Supreme Court decision or that the Congress will "fix" the language of the Act that currently seems to suggest that health care subsidies are available only to people in states that have set up state exchanges.
So, what are the best health insurance companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which health insurance companies made the list. And when you're done, be sure to read about which highly volatile tech stocks to buy now. Year-to-date returns are based on June 16, 2015, closing prices. The highest-rated stock appears last.MET data by YCharts
3. MetLife, Inc. (MET)
Rating: Buy, A-
Market Cap: $62.9 billion
Year-to-date return: 4.1%
MetLife, Inc. provides life insurance, annuities, employee benefits, and asset management products in the United States, Japan, Latin America, Asia, Europe, and the Middle East.
"We rate METLIFE INC (MET) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, impressive record of earnings per share growth, compelling growth in net income, attractive valuation levels and good cash flow from operations. We feel its strengths outweigh the fact that the company shows low profit margins."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The revenue growth came in higher than the industry average of 9.4%. Since the same quarter one year prior, revenues slightly increased by 6.4%. Growth in the company's revenue appears to have helped boost the earnings per share.
- METLIFE INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, METLIFE INC increased its bottom line by earning $5.42 versus $2.91 in the prior year. This year, the market expects an improvement in earnings ($5.89 versus $5.42).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Insurance industry. The net income increased by 62.5% when compared to the same quarter one year prior, rising from $1,328.00 million to $2,158.00 million.
- Net operating cash flow has slightly increased to $2,686.00 million or 8.13% when compared to the same quarter last year. Despite an increase in cash flow, METLIFE INC's cash flow growth rate is still lower than the industry average growth rate of 21.99%.
- You can view the full analysis from the report here: MET Ratings Report