Wellpoint, Health Insurers Look Bullish; What Will Congress Do?

Wellpoint Health Networks Inc. (WLP) is looking like a buy to Barron's, Morningstar and some technical analysts despite the stock's sharp runup since early March. Options traders seem to be more bearish on WLP.

Better pricing in the health insurance markets and the increasing odds that Congress won't create a Medicare for all, or public option health plan that would compete with Wellpoint are all very bullish.

But, and this is a big "but," there still is uncertainty about what kind of health insurance market changes will get through Congress this year or anytime soon. While the betting in Washington is that the public option is dead on arrival, the feeling seems to be that there is about a 50% chance that some kind of changes in the health insurance markets will be enacted before the end of the year. That's the top priority of President Obama and Congressional leaders.

While the highly flawed and biased New York Times/NBC and Washington Post/ABC polls show that most insured Americans are happy with their health insurance and health care costs, those polls also show that voters are worried about what health care reform would do to their health care costs, quality and access. And they're very worried that the reforms would sharply increase the federal budget deficit.

This means, of course, that Congressional reformers face huge obstacles and that health insurers like Wellpoint have less to fear from Congress than they did a few months ago.

Wellpoint bottomed out last March at $27.50, down from a 52-week high of $57.88. It recovered to about $52 before correcting to $51.34 as of Friday's close. Its bullish charts are here. Note that WLP has met its point and figure chart price objective of $51 a share. Wellpoint's key statistics are here.

In the June 29, 2009, Barron's, Johanna Bennett likes the stock because its forward PE ratio is 8.31 compared with a projected 10.5% annual growth rate, which gives WLP a PEG ratio (PE/projected growth rate) of 0.94. That looks cheap if you believe the growth rate projections, which are highly uncertain.

Barron's says Wellpoint's profits are "poised to outgrow the Street's expectations." We'll see. Morningstar gives WLP its top 5-star rating. It says WLP's fair value estimate is $95 and says consider buying the stock as long as it's under $66.50 and selling it when it tops $133. It gives its fair value estimate a medium uncertainty rating.

Morningstar's Matthew Coffina is bullish on the stock because he sees better pricing and margins despite rising unemployment. He thinks Wellpoint and its competitors are too smart to get into a price war because it wouldn't attract many new enrollees or improve profits. If health insurers can avert a price war, it would be one of the few times they did that during a major recession.

As mentioned in an earlier post, "Coffina's article" on the implications of possible changes in health insurance laws and regulations is one of the most comprehensive I've been able to find. Wellpoint, its competitors and exchange traded funds that track health and health care stocks all look very promising.

The big questions are, what will rising unemployment do to health insurers' bottom lines and stocks, and what kind of positive and negative surprises does Congress have in store for speculators in health care and health insurers' stocks?

Also note that while Wellpoint has been buying back shares, which inflates its earnings per share, it has not paid dividends. It's usually a mistake for companies to buy back shares because they usually pay too much for those shares, but any shares WLP bought since March probably were cheap.

One way to get a feel for WLP's stock price outlook is to check what options traders think of the stock. The WLP January 2010 $50 strike calls are priced at $7 bid a share. This means that bullish options traders think the stock will top $57 by next January. WLP January 2010 $50 strike puts are $5.70 bid, which means bearish options traders think the stock will be below $44.30 by next January. The put to call ratio is a bearish 2.81. It shows more options traders are buying puts than calls. However, if you're a contrarian, the ratio of puts to call trades is bullish because it shows too much pessimism.

The options market seems to be saying WLP is moderately risky. In a buy/write, or covered call trade of WLP Aug $50 strike calls, the annualized return over 54 days if the stock tops $50 when the August call option expires will be about 52.66%. If the stock closes below the $50 strike price and isn't called, the annualized return will be a still nice 35.02%.

Covered call trades on less risky stocks can be as low as 1% to 15% annualized. In a covered call trade, a speculator buys 100 shares of a stock and sells one call contract for 100 shares. In effect, the immediate 7.79% return on the trade gives you a hedge, or cushion, on the stock. A call option gives the buyer the right to buy a stock at the strike price, if the stock closes above the strike price. A put option gives a trader the right to sell a stock for the strike price if the stock closes below the strike price.

Charts for leading insurers and health ETFs, AET, CI, CVH, HS, HUM, UNH, WLP, XLV, IYH and VHT are here. Click on a chart to see a gallery of charts for a stock or ETF.

Disclosure: I don't have positions in WLP or any of the stocks or ETFs mentioned above.