Meet the S&P 500 stock I’ve just added to my portfolio…
In general, I think the S&P 500 looks heavily concentrated and expensive â not qualities I look for in an investment. But within the index Iâve found a stock to add to my portfolio.
I suspect a lot of UK investors are unlikely to have heard of Molina Healthcare (NYSE:MOH). Iâve been taking a closer look though, and I like the look of what Iâm seeing… very much.Â
Medicaid
Medicaid is the US governmentâs healthcare provision for â primarily â low income individuals. Itâs administered by individual states via a series of private companies that make the care happen.
Molina Healthcare’s one of these providers. The basic idea is that it gets money from a state and uses this to connect patients to doctors, hospitals, or whatever else they need in terms of healthcare.
Around 80% of Molinaâs revenues come from Medicaid and that makes it vulnerable to changes in government policy. And such changes are why the stock’s down 36% in the last 12 months. Thatâs the risk â and thereâs not much the company can do about it.
But I think the business has some unique advantages that make the falling share price a potential buying opportunity.Â
Costs
Medicaid providers canât increase the amount they charge individual states so the amount they get is fixed. What they can do however, is keep their own costs low â and Molina excels in this area.
Providers are required to spend at least 85% of what they receive on care. That means their profitability comes down to how they use the remaining 15% to cover their operating expenses. This is where Molina separates itself from other providers. Its cost ratios are typically lower than the likes of Centene, Elevance Health, or UnitedHealth Group and this is a huge advantage.
Lower costs mean the firm can keep making money while others are barely breaking even â 2025 being a good example. And this is why the stock jumps out at me from a buying perspective.
Molinaâs advantage
The obvious question is why Molina’s able to keep its costs lower than competitors â and why the likes of UnitedHealth canât do something similar. There are several reasons.
One is the companyâs focus on government-funded programmes. This means it avoids the costs that other businesses incur in marketing to employers that provide healthcare for employees.
A bigger reason though, is focus. This shows up in both the firmâs IT systems (where it uses a single platform) and in its physical presence (where it avoids separate offices in individual states).Â
This means Molina has much lower staffing requirements. And this translates into a cost structure that rivals canât match without spending billions on a digital transformation and reducing staff.
Investment thesis
Having lower costs than the competition is one of the most important advantages a business can have. And when thatâs a long-term strength, I get the interested in the stock as a potential investment.
I think this is the case with Molina Healthcare. Thatâs why Iâve been seeing the ongoing challenges in the US healthcare sector as an opportunity to start buying the stock for my portfolio.
The post Meet the S&P 500 stock I’ve just added to my portfolio… appeared first on The Motley Fool UK.
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Stephen Wright owns shares in Molina Healthcare. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
