Wolfe Research sees managed care companies underearning targets by up to 400%.

Investing.com -- Wolfe Research said Monday that managed care organizations continue to significantly underearn their target margins, with the gap between actual and target earnings ranging from 34% to 400% across major companies in 2026.

The research firm's analysis shows Molina Healthcare (NYSE: MOH), Humana (NYSE: HUM), and Centene (NYSE: CNC) face the largest earnings gaps, with current earnings per share 200% to 400% below targets due to pressures in Medicaid and Medicare Advantage programs and limited business diversification. CVS Health (NYSE: CVS), Elevance Health (NYSE: ELV), and UnitedHealth Group (NYSE: UNH) are also materially underearning at 34%, 63%, and 46% respectively in 2026.

Wolfe Research examined actual results from 2018 and projected trajectories through 2030, comparing them against target margins for each company. The firm said managed care organizations have not experienced margin pressure of this magnitude before, though it sees a clearer path to improvement in Medicare Advantage.

The managed care sector trades at a discount to typical multiples relative to the S&P 500 and at trough levels on an earnings power basis, according to the analysis. Wolfe Research views the group as offering compelling risk-reward potential given the opportunity for accelerated earnings growth from 2026 to 2030.

CVS Health remains Wolfe Research's top pick, citing the company's clearest path to margin improvement as it recovers earnings across businesses within Aetna.

The firm expects both Medicare Advantage and Medicaid margins to improve over time but prefers Medicare Advantage exposure. Medicare Advantage fundamentals reached new lows as cost trends, rates, and competition all troughed simultaneously in 2023 and 2024. Rates and competition are improving with cost trends stabilizing over the past 12 to 18 months.

Medicaid fundamentals hit new lows due to risk pool changes following redeterminations and cost trend pressure into 2025. Wolfe Research models margin improvement over the next several years as rates continue to account for elevated acuity, though regulatory pressure has added uncertainty with Medicaid cuts being part of the Republican reconciliation bill.