My review of my closely followed stocks this weekend pointed my attention to WellPoint, Inc. (WLP) (81.50, $50.5 billion market cap, S&P 500 member). I have long been a fan of the health insurance industry due to its consolidation, its ability to help control costs in one of the most inflationary parts of our economy and its relatively inexpensive valuation. Of course, the group essentially took 2006 off after a great run after the bubble popped in 2000.
Though almost all of the stocks look pretty good right now, but I will focus my attention on WLP, which is the only publicly-traded “Blue”. BC/BS has high share in all of the markets that it serves, and, increasingly, national contracting favors the Blues. Of course, WLP is the largest holding company of BC/BS franchises, with a wide geographic footprint. What follow are my technical analysis and an exploration of valuation, aided by my favorite database/investor tool, StockVal.
As you can see from the chart below, WLP appears to be breaking out after a long consolidation:
Note that the volume increased as the stock broke through resistance at 80 and has tailed off a bit as the stock has pulled back to test the breakout. Note also that the stock has been outperforming the broad market since it bottomed in late November.
From a longer term perspective, clearly WLP has been outperforming the broad market for quite some time:
From a valuation perspective, WLP is fairly inexpensive, trading at 14.4X 12-month forward expected EPS and a PEG ratio of 1.0. For comparison, the S&P 500 trades at 15.3X, slightly higher than WLP, and a PEG ratio of 1.3:
Here are a couple of more interesting things to consider. First, the earnings estimates have begun to rise. I tend to focus on the 2-year out number:
Second, the stock isn’t overbought (price momentum is only slightly positive):
It appears that we have a breakout stock, reasonably valued, and a leader in a strong industry that is experiencing rising earnings estimates. With a ton of volume over the past few years at 78, just 4% below these prices, the downside seems quite limited. What might be the upside? Applying a multiple of 16 to the 2008 consensus estimate of $6.38 yields a year-end objective of 102. I believe that one of the reasons that the group is starting to outperform again after consolidation is that the slowing domestic economy should favor these stocks, whose EPS are relatively immune from economic conditions.
Disclosure: Author has no position in WLP as of 2/25/07, although he may establish a long position in the near-term.