Politics forces Credit Suisse to downgrade this outperforming S&P/ASX 200 (Index:^AXJO) (ASX:XJO) stock

The share price of private health insurer NIB Holdings Limited (ASX: NHF) is giving back some of its recent heady gain following its pleasing full year profit result after Credit Suisse urged investors to sell into the rally.

The stock tumbled 3.3% to $6.40 in the final 30 minutes of trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index shed 1%.

However, the stock is still up a stunning 18% in just the last three months compared to a 10.5% gain by its rival Medibank Private Ltd (ASX: MPL).

Investors flocked to NIB after management announced an impressive 11.5% jump in underlying revenue to $2.2 billion as net profit increased 11.1% to $133.5 million.

But we live in interesting political times where our federal government has declared war on companies that are seen to be doing well at the expense of consumers.

Prime Minister Turnbull is giving the competition watchdog draconian powers to split energy companies that includes AGL Energy Ltd (ASX: AGL) and Origin Energy Ltd (ASX: ORG) if they don’t bring electricity prices down.

This may not save Turnbull from being toppled over the next week or two, but the corporate bloodlust won’t be quelled with a new conservative Liberal leader and Credit Suisse thinks the government will step in to “put the interest of the consumers ahead of industry margins”.

If a Labor government comes into power after the next federal election, things won’t improve for private health insurers either. After all, it was opposition leader Bill Shorten who is threatening to cap premium increases to 2% to help Aussie battlers get on top with cost of living increases.

“Having just passed through a 3.9% premium rate increase for FY19, NHF’s claims inflation is running at ~1.5% currently. This is in line with our previous analysis of the industry and questions are now being asked if a 2% premium cap is enough,” said Credit Suisse.

“So, while fair to say investors consider NHF’s FY19 guidance as very conservative, focus has already turned to the next pricing round.”

The broker has lifted its price target on NIB to $6.30 from $5.35 a share following its results but had downgraded the stock to “underperform” from “neutral” as it believes investors can’t assume that the insurer will keep generating the strong margins it booked in FY18.

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Motley Fool contributor Brendon Lau owns shares of AGL Energy Limited. The Motley Fool Australia has recommended NIB Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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