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HealthEquity Inc. (HQY) was not immune to the market wide sell-off in equities during the fourth quarter of 2018 which disproportionally impacted growth stocks with high price-to-earnings multiples. The market quickly lost its appetite for these richly valued high-growth stocks with steep valuations. Health Equity’s rich valuation became a concern to me during the fourth quarter as its growth albeit double-digits, did not justify its sky-high valuation. This concern prompted me to write a piece discussing this concern and warned that the “current valuation is rich in an already frothy market thus caution at these levels is wise” prior to the stock selling off from $101 to $47 shedding 53% of its market value during the fourth quarter of 2018. The company continues to post quarter after quarter of double-digit growth in revenue and EPS without any debt on the balance sheet thus has been rewarded with a rich valuation as a function of its impressive growth and total addressable market. This high price-to-earnings multiple came under fire as the market moved into a risk-averse environment in the fourth quarter. As high-flying equities came down in the broader market sell-off, Health Equity lost over half of its market capitalization and erased all of its gains in 2018. Now that the market correction has passed and the company continues to post great quarterly growth along with enhancing its growth profile, the valuation is now compelling moving into its Q4 earnings and the stock is still well off its highs for a long-term investment.

Addressable Market and Market Position

On the fundamental level, the company is 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. The company 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. Continue reading "HealthEquity - Compelling Buy Heading Into Q4 Earnings" →

The market-wide sell-off in equities during the fourth quarter has disproportionally impacted growth stocks that possess high price-to-earnings multiples translating into rich valuations. The market appears to have lost its appetite for the high growth and steep valuation equities that had huge upward moves throughout this record-setting bull market. HealthEquity Inc. (HQY) continues to post quarter after double-digit quarter growth in revenue and EPS and has been rewarded with a rich valuation as a function of its impressive growth. This high price-to-earnings multiple may be in jeopardy as the market moves into a risk-averse environment. As high-flying equities come down in the broader market sell-off, Health Equity may come down as a result and erase some of its monster gains that were witnessed in 2018. To be clear, Health Equity is an intermediary servicing the secular growth Health Savings Account (HSA) space that’s largely independent of legislative actions, drug pricing, rising insurance costs and not playing any role in the pharmaceutical supply chain. HealthEquity 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 company blew out the numbers when it reported its Q3 FY19 results and beat on both the top and bottom line.

HealthEquity manages $7.1 billion in assets across 3.7 million accounts against a potential market maturity of $1 trillion in assets across 50-60 million accounts. The durability of this growth has a long runway due to the secular growth in the HSA market. The company is sitting on largely untapped revenue sources where the vast majority of account holders have yet to invest any HSA money in investment offerings. Expanding margins for greater profitability is also unfolding as the older the account, the greater the gross margins. HealthEquity is currently sitting on a healthy balance sheet with $330 million in cash and cash equivalents with no debt. The company is posting accelerating revenue, cash flow, margin expansion and income growth with a strong balance sheet. I feel that HealthEquity will continue to post strong growth as it services the double-digit HSA growth market and manages more assets, accounts, and investments within these accounts. HealthEquity may be a great long-term investment in the healthcare space that’s independent of the health insurances, pharmaceutical supply chain companies, drug makers or pharmacies. Previously, I warned that the “current valuation is rich in an already frothy market thus caution at these levels is wise” and now it appears this heeding was responsible as the stock has sold off from $101 to $74 shedding 26% of its market value during the fourth quarter. Health Equity looks compelling after this healthy correction as the long-term narrative remains intact. Continue reading "HealthEquity Inc. - Rich Valuation Concerns?" →