Oakmark Buys Elevance Health on Bet Margins Will Recover
Harris Oakmark added Elevance Health to its equity and income fund, betting that temporary reimbursement mismatches will normalize and reprice the healthcare stock.
Harris Oakmark initiated a position in Elevance Health during the second quarter, citing a disconnect between the managed care organization's current earnings and its long-term profitability. The firm views the recent pressure on the company's government business lines as a transitory issue rather than a structural flaw.
The addition came during a challenging second quarter for the Oakmark Equity and Income Fund. With an allocation of 60.1% equities, 38.9% fixed income, and 1.0% cash, the portfolio underperformed its blended benchmark as investors crowded into a narrow group of AI-related stocks. The fund's equity allocation returned 6.84%, significantly lagging the S&P 500's 15.20% gain, while its fixed-income holdings outperformed, returning 1.13% against the Bloomberg U.S. Aggregate Bond Index's 0.67%.
Elevance Health serves more than 45 million members across employer-sponsored, individual, Medicare, and Medicaid plans. As of July 14, the stock traded at $425.17, giving it a market capitalization of $92.33 billion. Shares have climbed 26.46% over the past 52 weeks and gained 6.88% in the most recent month.
Despite the recent share price appreciation, Oakmark argues the market is still undervaluing the healthcare giant. The fund's letter noted that mismatches between reimbursement rates and medical cost trends have pushed margins in Elevance's government business below target levels for both the company and its peers.
"We believe this will prove transitory and that changes to pricing and/or plan designs will help realign margins closer to their historical ranges over time," Oakmark stated. The firm expects this return to normal profitability to take a few years but highlighted a key valuation metric: the stock trades at a discount to the broader market multiple even on its current depressed earnings base.
The trade highlights a broader tactical divide in current markets. While the second quarter rewarded a narrow leadership group, Oakmark maintained its focus on undervalued franchises. By leaning on Elevance's scale, diversified end-market exposure, and history of disciplined underwriting, the fund is positioning for a shift away from theme-driven investing back toward fundamental earnings normalization.
