Molina Healthcare: A Contrarian Buy as the Market Overreacts to Temporary Storms

The healthcare sector has been a rollercoaster in 2025, and Molina Healthcare (MOH) finds itself in the eye of the storm—wrongly, in my view. While the stock has lagged behind sector peers, I'm convinced this is a classic case of the market overreacting to short-term headwinds. Let me break down why now is the time to buy MOH before the storm clears and the sun shines on its long-term potential.

The Contrarian Play: Headwinds Are Transient, Not Terminal

Molina's Q1 2025 results show a company fighting through cyclical challenges but fundamentally intact. Revenue soared 12% to $11.1 billion, driven by Medicaid contracts, Medicare growth, and the ConnectiCare acquisition. Yet net income dipped 1% to $298 million, sending shares down. The market is fixated on two things: the loss of its Virginia Medicaid contract and a rising medical cost ratio (MLR) in its Marketplace business.

Let's dissect these “worries” one by one.

1. The Virginia Exit: A Necessary Evil, Not an Existential Threat

Effective June 30, Molina's Virginia Medicaid contract is ending. This will reduce Medicaid membership by 6.1%—a hit of 311,000 members. But here's why this isn't the end of the world:
- Diversification is working. The loss is offset by aggressive growth in the Marketplace (up 91% in membership to 316,000), Medicare (up 0.8%), and new Medicaid contracts in Nevada, Illinois, Florida, and Wisconsin. These states are key battlegrounds for Molina's future.
- Virginia's impact is backloaded. The financial hit won't fully materialize until Q3 2025, giving the company time to execute its mitigation strategies.

2. The MLR Surge: Temporary Pain, Not Permanent Damage

The Medicaid MLR rose to 90.3% in Q1, up from 88.5% in 2024, driven by rising costs for behavioral health, long-term services, and seasonal illnesses. The Marketplace MLR spiked to 81.7%, but this is partly due to the ConnectiCare acquisition, which brought higher-cost members. Here's why I'm not worried:
- Rate increases are coming. States are approving modest Medicaid rate hikes to offset rising acuity. Molina's Q1 premium revenue beat estimates, and its 2025 guidance assumes $42 billion in premiums—up 9%—which suggests pricing power.
- Operational discipline is intact. The G&A expense ratio dropped to 6.9% of revenue, and Molina is leveraging scale to cut costs.

The Contrarian's Edge: Buy the Dip While the Market Overreacts

The stock's YTD return of 7.4% lags behind the healthcare sector's 9.5% gains, and its $343.46 average price target suggests ~10% upside. But here's why the bulls have the upper hand:

1. Growth Catalysts Are Ignored

• New contracts are accretive. Molina's wins in Nevada and Illinois will add $8.65 per share to earnings this year.
• Marketplace momentum. Despite the MLR spike, the segment's premium revenue is expected to grow 60% in 2025.

2. Balance Sheet Strength

Yes, debt rose 22% to $3.6 billion to fund acquisitions and buybacks. But:
- Free cash flow is robust. A 26.72% return on equity (ROE) suggests efficient capital use.
- Share repurchases are a win. $500 million bought back in Q1 boosted EPS by 5.4%, and another $1 billion is authorized.

3. Valuation Is Undemanding

At 13.8x 2025 EPS estimates ($24.50), MOH trades at a discount to its 5-year average P/E of 16.8. This is a company with a 13%–15% long-term EPS growth target—targets it reaffirmed despite the Virginia loss.

Risks? Yes, but Manageable

• Medical inflation. Behavioral health and pharmacy costs could stay stubborn.
• Debt servicing. Interest costs are up 59%, but Molina's free cash flow should cover this.

The Bottom Line: Buy Now, Wait for the Turn

The market is pricing in worst-case scenarios for Molina's Virginia exit and MLR issues. But the data shows a company that's pivoting decisively: expanding into new markets, leveraging acquisitions, and maintaining financial discipline.

This is a contrarian buy at $312 (as of June 19). Set a stop-loss at $280 and aim for the $340–$360 price target by year-end. The storms will pass, and when they do, Molina's growth engine will roar back.

Action Item: Buy MOH now. Let the panic fade—then watch the rewards flow in.