Managed Care Sector Builds Momentum, Poised for Secular Growth

by: Harm Diaconescu

Managed health care equities had a blockbuster first half of the year, significantly outperforming the market as a whole. The Dow Jones U.S. Health Care Providers index has returned more than 23% YTD, about three times as much as the 8.58% return of the broader DJIA. Analysts have taken note, attributing the over-performance to a recovery in investor confidence from the uncertainty associated with health-care reform in the U.S. through 2010 and repositioning in more defensive sectors.

Looking at the performance of iShares' Dow Jones U..S Health Care Provider ETF (NYSEARCA:IHF) which attempts to track the price and yield performance, before fees and expenses, of the Dow Jones U.S. Select Health Care Providers Index, gives a sense of how strong the rally has been:

(Click to enlarge)

Beyond sentiment and momentum, however, the financials tell a compelling story. Here are last quarter's reported EPS results for the top 10 IHF holdings:

Company Reported EPS vs. Analyst Consensus vs. Last Year EPS
UNH 1.22 137% 123%
WLP 2.35 126% 120%
ESRX 0.66 95% 120%
MHS 0.91 103% 126%
AET 1.43 146% 146%
CI 1.37 125% 135%
HUM 1.86 99% 122%
LH 1.52 107% 117%
DGX 0.93 93% 98%
DVA 0.96 100% 93%

Sources: iShares Dow Jones Select Health Care Providers ETF Holdings, Fidelity Investments

While looking at EPS growth YOY and beats vs. consensus estimates is by no means a thorough analysis, the table above puts into perspective the impressive business results underlying the rally.

In my previous article on Aetna Inc. I highlighted some of the reasons why managed care as a whole is poised for sustained growth. Demography may not be destiny, but it comes pretty close. With the aging of America well underway and worries about judicial challenges to health care reform slowly but surely receeding, the sector appears to be experiencing a rare confluence of dramatically improving financials, technical momentum and bullish sentiment likely to lead to overperformance on an intermediate timeframe (3-12 mo.) as well as true secular growth for long-term investors.

Disclosure: I am long AET, UNH, WLP.

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