Caring Management

In the broad spectrum of the healthcare sector, the managed healthcare segment plays a critical yet understated role. This area is crucial in efficiently bridging the gap between complex insurance programs and the diverse and varied needs of patients.

The most successful healthcare entities are adept at incorporating technology and innovative service strategies in support of streamlined and effective healthcare delivery.

The demand for managed healthcare is persistent and is by and large unaffected by the surrounding economic environment. This sector not only grows with expanding health needs in prosperous times but also provides a crucial safety net during economic downturns.

The long-term prospects for the managed healthcare industry are bolstered by increasing health awareness, improvements in longevity, and an aging population. These factors suggest a sustained demand for comprehensive health management, ensuring the sector’s ongoing growth and relevance. Managed healthcare, with its blend of innovation and practical application, stands poised for continued development and stability.

We will present one of the leading companies in this industry, but first, let’s delve into a short update on the economy and markets, and the Smart Investor calendar.


Economy and Markets: Looking Forward

There are several important reports scheduled to be published in the next few days.

  • Tomorrow, we’ll receive the crucial December’s CPI and CPI ex. Food and Energy (Core CPI) reports. These reports measure changes in the retail prices of goods and services in corresponding data subsets. The CPI report is one of the two key inflation measures (the second one is the Personal Consumption Expenditures or PCE). Policymakers, businesses, and consumers closely watch the CPI report, as it reflects the price trends in the economy, shapes consumer spending and business outlooks, and directly affects the Federal Reserve’s policy rate decisions.

  • On Friday, the Bureau of Labor Statistics will release December’s Producer Price Index (PPI) report. This report reflects input prices for producers and manufacturers. Since PPI measures the costs of producing consumer goods – which directly affects retail pricing – PPI is seen as a good pre-indicator of inflationary pressures, i.e., a leading indicator for the next month’s CPI. The PPI directly impacts the overall inflation outlook among policymakers.

  • Also on Friday, the University of Michigan will publish the preliminary January’s Michigan Consumer Sentiment Index. This report portrays the results of a monthly survey of consumer confidence levels and consumer views of long-term inflation in the United States. The level of confidence affects consumer spending, which contributes about 70% of the U.S. GDP.

As for the stock calendar, the Q4 2023 earnings season for Smart Investor Portfolio companies is beginning with the quarterly results of UnitedHealth (UNH), scheduled to be published on January 12th.

The ex-dividend date for EMCOR Group (EME) is January 12th, and for Accenture (ACN) it is January 17th.


Today, we are adding the stock of one of the largest government and commercial health plan providers in the U.S., one that features stellar finances and robust earnings growth.

To make room for this valuable addition, we are letting go of a healthy and robust European chipmaker, whose stock is expected to display weak performance in the next few quarters due to softer global demand.


New Addition: Centene Corporation (CNC)

Centene Corporation is a diversified healthcare company that provides a full spectrum of managed healthcare products and services, primarily through Medicaid, Medicare, and commercial products, acting as an intermediary between government-sponsored and privately insured healthcare programs, and individuals and groups. The company provides its services through primary and specialty care physicians, hospitals, and ancillary providers.

CNC operates through two main segments: Health Plans and Specialty Services. The Health Plans segment offers health plan coverage to individuals and groups through government subsidized programs, such as Medicare (Special Needs Plans) and Medicaid, including the State Children’s Health Insurance Program (CHIP), Aged, Blind or Disabled (ABD), Foster Care and Long Term Care (LTC), as well as other state-sponsored and hybrid programs. Under the same segment umbrella, the company also delivers a variety of individual and group commercial healthcare products to employers and members.

The Specialty Services segment offers behavioral health and employee assistance plans, clinical healthcare, primary care, various specialty services, and a suite of social and other support services, as well as auxiliary healthcare services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations. This segment also engages in the government contracts business under the TRICARE program and other healthcare-related government contracts. In addition, the Specialty Services segment offers administrative services to eligible Military Health System beneficiaries, vision and dental health services, and traditional pharmacy clinical and administrative services, as well as pharmacy benefit services through its specialty pharmacy business.

The company was founded in 1984 as a nonprofit Medicaid plan by a former hospital bookkeeper, Elizabeth (Betty) Brinn. After the death of Brinn, the non-profit organization was sold to investors, with the proceeds going to the Betty Brinn Foundation, which subsequently became a major shareholder in the company. The company was renamed Centene Corporation in 1997, with its corporate headquarters in St. Louis, Missouri. In 2001, Centene became a public company, with its shares trading on the New York Stock Exchange (NYSE).

Throughout the years, Centene grew and expanded through both internal efforts and acquisitions, extending its reach to additional states and offering an increasing number of plans and services. CNC has bought 22 companies (although it divested from several of them afterward), with the most notable recent acquisitions including the purchases of the government-sponsored managed care services provider WellCare in 2020 and the behavioral health insurer Magellan Health in 2022.

Today, Centene Corp. is the largest Medicaid managed-care organization in the country and is the #1 carrier on the Health Insurance Marketplace. Centene serves roughly 28 million health plan members, which amounts to one in 15 individuals across all U.S. states.

CNC commands a market capitalization of over $41 billion, an annual revenue of $144.5 billion, and a workforce of ~74,000 employees. It ranks as #25 in the Fortune 500 list of the largest U.S. companies by revenue and #60 in the Fortune Global 500 ranking of the world’s largest companies by revenue.

As of 2023, the company derived over 64% of its revenue from Medicaid, 15.5% from Medicare plans, and 12% from commercial health plans, with the remainder derived from other services.

Centene Corp.’s financial health is more than stellar. While its debt-to-equity ratio stands at 71%, it has zero net indebtedness with more cash on hand than its total debt. CNC’s short-term assets exceed both its short- and long-term liabilities; its debt is very well-covered by operating cash flows, while interest payments on its debt are covered by EBIT many times over. The company’s superior balance sheet, which reflects the company’s prudent management, provides resilience against economic and market volatility. The company’s robust liquidity position is underscored by its current ratio of 1.1 and quick ratio of 1.0.

Centene’s debt is highly rated by the world’s leading credit-rating agencies: “BBB” at Fitch, “BBB-“ at S&P Global Ratings, and “Ba1” at Moody’s, representing the second-highest debt rating level.

Particularly, Fitch reaffirmed CNC’s rating in September 2023, applauding the company’s “improved financial performance and a favorable company profile.” According to the agency, Centene “has a favorable competitive position due to its leading positions in the U.S. Medicaid and Individual Exchange markets, and significant operating scale, outweighing moderate scores for business risk profile and diversification.”

As for capital efficiency, the company’s Return on Equity (ROE) of 9.7%, Return on Assets (ROA) of 4.2%, and Return on Invested Capital (ROIC) of 7.4% are in line with industry averages. CNC operates in a very low-margin industry; its gross margin of 16.2%, EBITDA margin of 5%, operating margin of 4.1%, and net profit margin of 3% are also similar to the averages of its peers.

What makes Centene stand out among its competitors is its robust performance, as evidenced by its earnings reports. In the past five years, CNC’s revenues have increased at a CAGR of 21.5%, while its earnings-per-share rose by a CAGR of 14%, almost twice the average rate of earnings growth in its industry.

Since the beginning of this century, Centene has consistently clocked in double-digit annual EPS growth. It has surpassed EPS estimates in all quarters for which these estimates were available, with only two quarterly exceptions: in Q1 2020 and Q4 2020.

On October 24, the company reported its Q3 2023 results, featuring another strong beat on revenue and earnings. Revenue increased by 6% year-on-year, driven by membership growth in its plans, particularly in the Marketplace business. Adjusted EPS surged by 54% year-on-year, following double-digit growth in the two previous quarters.

Following these exceptional results, the company’s management raised its full-year 2023 adjusted diluted EPS guidance by 3% to at least $6.60, building on similar guidance upgrades in the two previous quarters and reflecting an increase of more than 14% from 2022. In addition, in December 2023, CNC raised its full-year 2024 adjusted EPS forecast to at least $6.70 – which will probably be upgraded further down the road, as judged by the company’s track record of constant raises in its earnings outlooks.

Also in December, CNC’s Board of Directors authorized a $4 billion increase to the company’s existing stock repurchase program. The increase is in addition to the approximately $1.2 billion remaining under the previously authorized program. In the first three quarters of 2023, Centene’s buybacks totaled $1.6 billion, as a part of its strategy to return capital to shareholders.

Despite the consistently strong earnings performance, Centene’s stock languished over the past year, declining by 1.1%. The company’s shares were driven down by the negative market sentiment towards healthcare providers, which was evident for most of the year. In addition, there were some company-specific issues, such as small declines in its Medicaid and Medicare market shares. However, these declines were more than offset by the continued strong increase in its Commercial Marketplace membership, which is a much higher-margin business than government plans. The sentiment seems to have improved significantly in the last months of 2023, consistent with a brighter economic outlook, as CNC has seen its shares surge by over 25% from their low in September. In the past three years, Centene’s stock rose by 14%.

Following its underperformance in the past year, CNC’s stock is trading at very attractive valuations. Its TTM P/E of 17.3 and a Forward P/E of 14.9 represent 46% and 50% discounts, respectively, to the Healthcare sector’s averages, representing a significant value opportunity when comparing the valuations to the company’s earnings growth outlook.

In the past several months, several TipRanks-scored top Wall Street analysts upgraded their outlook on Centene’s stock. Analysts from Truist Financial, UBS, Cantor Fitzgerald, Jefferies, and Oppenheimer raised their price targets for the stock. The top-rated analysts now see an additional upside of 14.2% for the stock over the next 12 months. Given its strong fundamentals and performance, it may even surprise further on the upside.

Centene Corporation carries a TipRanks Smart Score rating of  9/10 (“Outperform”) with a “Moderate Buy” recommendation:

Considering Centene’s stellar financial health, robust profitability, and optimistic earnings growth outlook, we believe that it is well-positioned to deliver strong stock performance in the long term. Coupled with the company’s more-than-modest valuation, in our view, it represents a compelling combination of value, quality, and stable growth, and as such, a valuable addition to the Smart Investor portfolio.


New Deletion: Infineon Technologies AG (DE:IFX, IFNNF)

Infineon Technologies develops, manufactures, and markets a very broad range of semiconductor products for the communications, automotive, and memory markets. Infineon is one of the world’s top 10 semiconductor companies and Germany’s largest semiconductor manufacturer. It supplies the leading electronics companies with components and systems that enable the functionality of mobile phones and notebooks as well as advanced automotive electronics.

Infineon possesses impeccable financial metrics, such as a very low debt level, robust capital efficiency ratios, as well as industry-beating profit margins. In the past three years, the company has registered outstanding revenue and earnings-per-share growth and managed to outpace ever-increasing analysts’ expectations.

Despite consistently beating revenue and EPS estimates in nine consecutive quarters and reporting record revenue and earnings in the 2023 fiscal year (ended September 30, 2023), the company’s stock underperformed the broad market in the past year.

In part, this underperformance was brought on by the industry-wide slump, as the chipmakers have been under pressure from declining demand after customers finished their post-pandemic restocking. In addition, weak sales of PCs, smartphones, and other consumer electronics depressed demand for non-AI-related semiconductors. In fact, the global demand for IoT-related chips has also weakened in recent months.

Moreover, one of IFX’s largest end markets, the auto industry, has seen sales weakness in the past several months, while the industry’s chip inventories are still overstocked after the post-pandemic panic onloading. The automakers are expected to “digest” these stockpiles around the second half of 2024, but for now, more weakness is in the cards. In addition, one of Infineon’s important geographic sales segments, China, is going through an economic rough patch, adding to slowing demand.

The lower demand was apparent in IFX’s latest quarterly results, which included lower revenue and operating profits than in the previous year’s comparable period, as well as slightly narrower margins. The company acknowledged demand issues, saying that although sales will continue to grow in FY2024, the rate of growth is projected to be much slower than in FY2023. The management penciled in revenue growth of just 4% in fiscal 2024, versus 15% in fiscal 2023.

Despite the ongoing temporary weakness, the company’s long-term prospects are bright, strengthened by the recently announced partnership with the world’s largest chipmaker foundry, Taiwan Semiconductor Manufacturing (TSM), and peer companies Robert Bosch and NXP Semiconductors (NXPI), to build a chip factory in Germany. The factory is aimed at meeting the European automotive and industrial sectors’ demand for semiconductors, as the European Union, in a similar manner to the U.S., aims to become self-sufficient in chip production. The factory is planned to become operational in 2027.

Infineon remains a well-run company with robust finances and a great medium- to long-term earnings growth outlook, but its temporary weakness on the back of softening demand is expected to continue weighing on its stock performance for the next few quarters. While we may reevaluate the company in the future, for now, we believe it is appropriate to sell the stock.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

The markets ebbed and flowed in the past week, and our exclusive club’s ranks have widened again. Ladies and gentlemen, please welcome Super Micro Computer (SMCI) with a 35.1% increase since we recommended the stock two months ago.

The Winners Club now includes five stocks: GE, AVGO, ANET, CDW, and SMCI.

The runner-up to the Winners ranks is now WCC with 28.9% since purchase. Will it be able to close this minute gap, or will another stock outrun it to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, January 17th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
CNC Jan 10, 24 $78.01

New Portfolio Deletions

Ticker Date Added Current Price % Change
DE:IFX Apr 5, 23 $35.28 -0.58%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $128.78 +130.46%
AVGO Mar 22, 23 $1082.49 +71.57%
ANET Jun 21, 23 $245.20 +61.84%
CDW Jun 29, 22 $218.18 +38.02%
SMCI Nov 8, 23 $343.73 +34.58%
WCC Sep 14, 22 $172.92 +28.89%
ORCL Dec 21, 22 $103.63 +27.15%
MOH May 3, 23 $380.46 +27.02%
GD Dec 22, 21 $251.24 +23.30%
STLA Sep 6, 23 $22.34 +23.02%
ITT Oct 18, 23 $116.11 +21.57%
VRTX Aug 2, 23 $421.01 +21.07%
CHKP Jul 19, 23 $153.46 +20.53%
ULTA Nov 15, 23 $485.06 +19.73%
JBL Jul 5, 23 $128.37 +17.57%
CI Jul 12, 23 $312.87 +16.44%
PH Oct 11, 23 $457.46 +14.99%
AMAT May 31, 23 $151.03 +13.30%
ACN Aug 16, 23 $342.75 +11.41%
UNH Apr 19, 23 $538.37 +10.73%
TSM Aug 23, 23 $101.89 +8.64%
APH Aug 9, 23 $95.85 +8.38%
CXT Oct 25, 23 $54.45 +5.20%
MCK Dec 13, 23 $481.06 +4.09%
EME Nov 1, 23 $214.22 +3.80%
TXT Nov 29, 23 $78.24 +1.73%
DB Jan 3, 24 $13.81 +1.47%
STM Sep 13, 23 $44.67 +1.13%
AIT Dec 6, 23 $165.96 +0.74%
EA Nov 22, 23 $137.72 +0.69%
LW Apr 13, 23 $107.41 -0.70%
HUM Dec 20, 23 $459.30 -0.92%
EG Oct 4, 23 $368.51 -1.25%
ENS Dec 27, 23 $98.84 -4.70%



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