3 Best Stocks to Invest in Medicaid

By Markets Fool.com

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What's the fastest-growing health plan in the nation? You'd be hard pressed to find one growing faster than Medicaid. Thanks to the Affordable Care Act, more than 10 million Americans have been added to Medicaid, including the Children's Health Insurance Program (CHIP).

This kind of growth inevitably creates opportunities in the private sector -- and for investors. Which stocks are the best buys to play the Medicaid boom? Here are three stocks that stand out above the rest in my view.

Molina Healthcare
Serving the Medicaid market has been Molina's primary mission for more than three decades. The company offers Medicaid managed care health plans in 11 states. ItsMolina Medicaid Solutions business unit holds Medicaid management information systems, or MMIS,contracts with six states plus the U.S. Virgin Islands.

As Medicaid goes, so goes Molina. The company saw annual revenue jump 46% in 2014 to $9.7 billion with year-over-year earnings increasing over 17% to $62.2 million. That's the kind of improvement that definitely attracts the attention of investors. Molina's stock soared more than 88% over the past 12 months and is up 17% year-to-date.

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The stock's success has led to what some might consider to be a frothy valuation. Molina's current price is over 48 times its trailing 12-month earnings. However, the company's prospects make this valuation seem less scary. Molina expects earnings to surge more than 80% in fiscal 2015. Its forward-looking price-to-earnings ratio is a little over 18 -- not bad considering the likelihood for continued strong growth in years to come.

Centene Corporation
Like Molina, Centene focuses primarily on Medicaid. And despite being founded a few years later than Molina, Centene has grown faster than its rival. The company offers Medicaid managed care plans in 17 states. Centene also offers Medicare managed care plans in most of those same states and participates in the Obamacare health insurance marketplaces for eight states.

Centene's revenue in 2014 skyrocketed to almost $16.6 billion -- 52% higher than the prior year. Earnings grew at an even faster rate, climbing 64% year-over-year to $271 million. Not surprisingly, Centene's shareholders enjoyed tremendous gains over the last 12 months, with the stock jumping 150%. So far in 2015, Centene's stock is up 34%.

Despite this tremendous run, Centene's trailing 12-month earnings multiple stands just below 31. That's high, but not enough to cause acrophobia among investors. Centene's forward multiple of 23 makes the stock look a little pricier than Molina right now, but it's still a good candidate for consideration.

Anthem
Medicaid also plays a significant role for Anthem, the nation's second-largest health insurer. Anthem dramatically expanded its Medicaid presence in 2012 with the acquisition of Amerigroup. The company offers Medicaid health plans in 19 states. Medicaid accounts for nearly 14% of Anthem's total medical membership.

Anthem's financial results haven't been as sizzling as its smaller and more pure-play rivals. Revenue in 2014 grew 4% compared to the prior year, while earnings grew 3.2%. However, Anthem's stock has still performed quite well -- increasing 66% over the last 12 months and 21% year-to-date.

These impressive gains don't seem to have made Anthem's stock too expensive, with a trailing earnings multiple of 17 and a forward multiple of 14. Anthem, however, probably won't experience the rapid earnings growth associated with Medicaid that Molina and Centene will.

Growing importance
The federal government projects that Medicaid spending will grow 6.7% in 2015, 8.6% in 2016, then 6.8% per year on average through 2023. What those numbers don't address is how that spending will shift. Expect managed care to play an increasingly important role for Medicaid in the years to come.

More Medicaid managed care means more opportunities for Molina, Centene, and Anthem. The market is certainly large enough for all three companies to enjoy continued success. For investors looking to find the best ways to invest in the Medicaid multiplication, these three stocks appear to be among the best picks.

The article 3 Best Stocks to Invest in Medicaid originally appeared on Fool.com.

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Anthem. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.