HealthEquity Inc. (HQY) has witnessed several volatile moves of significant magnitude over the past few months with sell-offs highly correlated to the overall healthcare sector. Despite the company’s fundamentals, growth narrative, financial profile, and addressable market remaining strong and positive, the stock has underperformed over the past few months. Historically, HealthEquity’s valuation has been rich, so it’s no surprise that the stock has traded off with the broader market downturns, which disproportionally impact growth stocks with high price-to-earnings multiples. HealthEquity has traded in a 52-week range between $101 and $50 and currently trades at the $70 level after posting its most recent earnings. The company continues to post quarter after double-digit quarter growth in revenue and EPS without any debt on the balance sheet. I feel that the stock is incorrectly lumped into the broader healthcare cohort due to its business model and independence from healthcare insurers, the pharmaceutical supply chain, and drug manufacturers. For long-term investors, HealthEquity presents a compelling picture of growth with a large addressable market moving forward.
Incorrect Correlation to Healthcare
HealthEquity’s business model is such that it stands as an intermediary servicing the secular growth Health Savings Account (HSA) space that’s largely independent of legislative actions, drug pricing, rising insurance costs while not playing any role in the pharmaceutical supply chain from health insurers to end user pharmacies. The company simply manages funds allocated for medical, dental, and vision expenses that are deducted on a pre-tax basis and deposited into a dedicated HSA account. The HSA space has grown in popularity as corporate adoption has allowed access to these plans in conjunction with consumer awareness.
Many of the healthcare related stocks have lost significant portions of their respective market capitalization over the past year. Large-cap stocks such as CVS Health (CVS), Walgreens (WBA), McKesson (MCK) and Cardinal Health (CAH) have been some of the worst performing stocks. These stocks have been in secular decline due to the confluence of legislative threats, drug pricing pressures, and pro-single payer healthcare by top Democratic officials. HealthEquity is in a unique position that circumvents many issues that have plagued these stocks. The company is here to stay regardless of the aforementioned hot button issues. Continue reading "HealthEquity: Incorrectly Correlated To Healthcare Downturn"