Learn to Love Your HMO

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Health care reform has spooked investors in this sector, but some stocks could be bargains nok

All the ruckus in Washington over reforming the health care system has made Wall Street just sick about health care firms, particularly the outfits that insure more than half of Americans: managed-care companies. Indeed, investors have been nervous about the sector for months now, as they fret about the impact of any changes. “Some days, managed-care stocks feel like size 47 pants at TJ. Maxx, ” says Jeff Markunas, portfolio manager of the RidgeWorth Large Cap Core Equity fund.

A number of savvy investors say this short-term malady is a good opportunity to purchase the profit-producing health insurers—and provide a booster shot to a portfolio over the long run. Almost all the managed-care companies have little debt. More important, the stocks appear uncharacteristically cheap. Most health insurance company stocks are trading at some of their lowest valuations in nearly 20 years, says Thomas Carroll, managing director of health care research for the investment bank Stifel Nicolaus.

Managed-care companies are, as some politicians like to point out, very profitable. UnitedHealth Group (UNH), the largest of the bunch by market value, had nearly $2.9 billion in profits in the first three quarters of 2009, a 22 percent increase from the same period a year earlier. Amerigroup (AGP) was hurt by swine-flu-related costs but still managed to earn $109 million, or $2.07 a share, in the first three quarters of 2009. And many of the companies are sitting on lots of cash. WellPoint (WLP) has $1.8 billion in cash, and that’s after it spent $1.8 billion during the first nine months of 2009 buying back its shares. WellPoint’s cash horde could rise even more if it sells off its pharmacy-benefits- management business. It’s also a cheap stock, trading at less than nine times this year’s expected earnings, says Charles M. Fernandez, president of Fairholme Capital Management, which bought more shares recently.

Of course, a plan run by the federal government could force some private insurance firms to cut their prices. Still, analysts say, reform efforts likely will increase the pool of potential customers for the insurers since the proposals under consideration involve some sort of subsidies for people to buy their own policies or penalties to employers for not providing insurance. In the meantime, these pros say the stocks’ valuations look too good to pass up.

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