Summary
- I recently sold my HMS Holdings shares at $39 after buying in at $30 in May.
- The sudden 30% run-up surprised me, given the general bearish sentiment around healthcare stocks in general due to potential shifts in national healthcare policy.
- The stock has been beating quarterly expectations >2 years following a multi-year turnaround, but the stock had been flat since August due to policy risk. The policy risk is unresolved.
- Despite the strong turnaround since 2017, insiders are dumping shares at a torrid rate.
Thesis
I have followed HMS Holdings (HMSY) for several years and first wrote about the company nearly a year ago. At the time, I noted the company's strong turnaround in recent years after it shifted to a strategy of focusing its sales efforts more heavily to the commercial health insurance space after developing a near-monopoly in the Medicaid Fee-For-Service coordination of benefits market.
After buying in at $30 in May, I recently sold at $39. Though I wasn't surprised at the continued strong execution of the company, I was surprised that shares were so richly rewarded in the run-up to - and after - the Q2-19 results. In short, I didn't expect the stock price to go up as fast as it did.
I viewed HMS Holdings as a reasonable bet at $30. The company had been exceeding sales and profits expectations since 2017, but the stock had continued to get hammered by news of potential policy risk, both from the looming appellate court battle over the legality of the Affordable Care Act and the threat of a potential Medicare For All healthcare system.
Though experts predict neither an ACA repeal nor Medicare For All is likely, it's possible the experts are wrong. And though the company has turned around and is growing, and management sounds as positive as ever about its business prospects absent a major healthcare policy shift, insiders continue to dump shares at a torrid rate. Given the recent run-up, I've decided to take profits and watch from the sidelines.
Solid Quarter And Improved Guidance
HMS Holdings reported solid revenue growth of 15%, beating consensus estimates, with strongest growth in analytics and program integrity. Coordination of benefits, which is the company's primary vertical, saw growth of nearly 5%.
While the company topped revenue growth and EPS projections, the company also raised full-year revenue and earnings guidance, the notable highlight here being earnings guidance which was boosted 30% based on various factors, including growth, operational efficiency, and a tax benefit.
The stock had begun a steady climb from the low $30s and hit $35 before the earnings release on August 2. Shares surged on the report and have hovered at $39 ever since.
I was not surprised by another strong quarter. The company has diversified its revenue streams away from dependence on government contracts and the company's revenue and EPS growth over the last two years has been impressive. I detailed the turnaround in my September 2018 article.
That said, the policy issues that have slammed the stock of HMS Holdings and other major healthcare stocks over the last year have not subsided. There is a still the chance that the federal courts could strike down the Affordable Care Act as unconstitutional. And leading Democratic candidates for president continue to insist that Medicare For All would be a preferable healthcare system to the one we have today. Under either scenario, HMS Holdings would get slammed. The company's addressable market has expanded markedly under the ACA, largely due to the expansion of Medicaid, which is the company's primary source of revenue, both from direct contracts with Medicaid agencies and from contracts with Medicaid Managed Care Plans. Under a Medicare For All scenario, HMS' addressable market would likely be greatly diminished.
