3 Top Medicaid Stocks to Buy in 2017

By Keith Speights Markets Fool.com

A lack of clarity about the fate of the Affordable Care Act, more commonly known as Obamacare, has also meant a lot of uncertainty about Medicaid. While a considerable level of uncertainty remains, Medicaid expansion appears to be safe for now. That means several stocks of companies specializing in Medicaid could be on track to perform better than they otherwise would have.

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Top Medicaid stocks to buy in 2017 include Aetna (NYSE: AET), Centene (NYSE: CNC), and UnitedHealth Group (NYSE: UNH). Here's why these three stand out.

Image source: Getty Images.

Aetna: Positive overall but facing negative Medicaid impact

Aetna is one of the largest health insurers in the country and is also one of the companies with the largest presence in state Medicaid programs. The company offers healthcare services for Medicaid and the Children's Health Insurance Program (CHIP) in 16 states. Aetna participated in Medicaid managed care programs in 12 markets. Medicaid products accounted for 13% of Aetna's total revenue last year.

Like several insurers, Aetna reduced its participation in most Obamacare exchanges. That move is expected to help improve the company's bottom line this year. Aetna anticipates gaining from strong growth in its Medicare Advantage products as well. Ironically, while Aetna is one of the best stocks to invest in with a strong Medicaid presence, the company projects a negative impact on earnings in 2017 from its state Medicaid business.

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Although Aetna wasn't successful in its attempted merger with Humana (NYSE: HUM), the blocked deal shouldn't have too much residual effect. Aetna's share price remains attractively valued, currently trading at 13 times expected earnings.

Centene: More of a Medicaid pure-play pick

Unlike Aetna or UnitedHealth Group, Centene receives most of its revenue from its Medicaid managed care programs. The company has Medicaid contracts in 20 states, 10 of which participated in the Obamacare Medicaid expansion program.

Centene greatly increased its business with its 2016 merger with Health Net. The deal created the largest Medicaid managed care program in the U.S. In addition, the Health Net merger expanded Centene's products to include Medicare Advantage and allowed the company to inherit Health Net's contracts with the departments of Defense and Veterans Affairs.

Centene shareholders were understandably elated by the failure of Republicans legislators to replace Obamacare. The health insurer's stock plunged after the November election but has surged in 2017 as a rollback of the Medicaid expansion seemed increasingly more unlikely. Centene stock now trades at 13.6 times expected earnings, which isn't bad at all, especially considering the company's growth potential if Congress leaves Medicaid expansion regulations unchanged.

UnitedHealth Group: Medicaid and a whole lot more

UnitedHealth Group is the largest health insurer in the U.S. It also offers Medicaid managed care services in 22 states, more than any other organization. Fifteen of those are Medicaid expansion states.

Although UnitedHealth is an important player in the Medicaid market, other lines of business are more important to the company. It makes significantly more health insurance revenue from its Medicare and commercial business.

Its Optum business segment, which includes the OptumRx pharmacy benefits management unit, is UnitedHealth's most lucrative business of all.Optum does generate at least some of its revenue from Medicaid, with OptumHealth having experienced growth in 2016 from its expansion of behavioral services into new Medicaid markets.

Best pick

UnitedHealth Group is the most expensive stock of the three, with shares trading at 15.6 times expected earnings. However, that higher valuation is deserved because of Optum's growth.

Centene is too dependent on Medicaid, in my view, to earn the top spot out of these three Medicaid stocks. While the share price will go up as long as Medicaid is left alone by Congress, there's no guarantee how long that will be the case.Both Aetna and UnitedHealth Group are well-diversified beyond Medicaid. UnitedHealth's advantage, though, is that it has Optum.

Over the long run, I think all three of these stocks will perform well. I also think the long-term prospects of Medicaid managed care should be solid. If you only went with one stock, though, I'd pick UnitedHealth Group.

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Keith Speights has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.