Insurance companies were out of favor during the health reform debate in 2010. Investors are concerned about government’s role in the healthcare market, but eventually they decided that expansion of health insurance will benefit the insurance companies. That’s why UnitedHealth has been outperforming the market since the summer of 2010. The stock dipped below $28 back then; today it is trading around $50.
Fund managers are still bullish on the stock. Louis Navellier just initiated a $37 million position in UnitedHealth during the second quarter. We are going to take a closer look at UnitedHealth Group, Inc. (NYSE:UNH), Aetna Inc. (NYSE:AET), Humana Inc. (NYSE:HUM), WellPoint Inc. (WLP), and HealthSpring Inc. (Pending:HS) to determine which stocks in the Health Care Plan industry promise higher returns for investors.
The company reported revenues of $25.2 billion for the second quarter of 2011. Second quarter operating income was $2.1 billion. The company has $4.46 billion in net cash on its balance sheet. Its EPS is $4.51 during the past 12 months. UnitedHealth is expected to earn $4.49 in 2011 and $4.77 in 2012. The stock recently traded at $49.03. Its current P/E ratio is 10.88 and forward P/E ratio is 10.3.
UnitedHealth is expected to grow its earnings by 12.2% over the next 5 years. This implies that its P/E ratio using its 2014 earnings is around 8.17. Aetna is expected to grow by 10.3% over the next 5 years, and its P/E ratio using its 2014 earnings is around 6.47. Humana’s expected growth rate is 7.3%, and its corresponding P/E ratio is 8.88. WellPoint’s expected growth rate is around 9.3%, and its P/E ratio using its 2014 earnings is around 7.41. HealthSpring is expected to grow by 9.6%, and its P/E ratio using its 2014 earnings is 10.33. HealthSpring jumped more than 30% this week after Cigna (NYSE:CI) agreed to buy the company for $3.8 billion. UnitedHealth looks slightly undervalued compared to Humana and HealthSpring. Aetna and WellPoint also look to be trading at a slight discount, assuming their growth estimates are accurate.
Volatility is generally used as a measure of risk. UnitedHealth’s beta is 0.82, Aetna’s beta is 1.2, Humana’s beta is 1.05, WellPoint’s beta is 0.94, and HealthSpring’s beta is 1.64. UnitedHealth’s beta is the lowest in the group, but isn’t much different than its comparables and the market.
Hedge Fund Ownership
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. WellPoint was the most popular stock among hedge funds at the end of second quarter. UnitedHealth was the second most popular stock. There are 50 hedge funds (nearly 20% of the funds tracked by Insider Monkey) that had bullish bets on UnitedHealth. There are 42 and 32 hedge funds were bullish about Aetna and Humana, and 18 hedge funds were bullish about HealthSpring. D.E. Shaw was bullish about UnitedHealth, Humana and HealthSpring.
Stocks purchased by insiders tend to outperform the market on the average. UnitedHealth and Aetna both had one insider purchase during the past 6 months. None of the other stocks in this group had insider purchases during the past 6 months.
Overall our analysis points out that UnitedHealth, Aetna and WellPoint are slightly undervalued compared to the other stocks in this group. Strong hedge fund interest for these three stocks also indicates some form of perceived value in this space. All of these stocks outperformed the market significantly since the end of second quarter as well. We like UnitedHealth and urge investors to do an in-depth analysis of the stock for their portfolios.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.