The managed care group, as represented by the Dow Jones U.S. Healthcare Providers Index Fund (IHF), is up about 8% YTD. Although healthcare services are generally a secular growth opportunity, relatively unaffected by global macro-economic conditions, the sector has been unusually volatile in recent times, plagued by legislative and political issues, especially as it relates to President Obama's Patient Protection and Affordable Care Act that was passed in 2010. Meanwhile, many carriers are looking at global markets for expansion opportunities, away from all the regulation risk in a relatively unfettered markets in the emerging markets and Asia.
In this article, we cover the investing activities of the world's largest money managers or mega funds in managed care company stocks, based on our research of the latest available institutional 13-F filings. Taken together these mega fund managers, managing between $50 billion and over $700 billion in 13-F assets, control over 35% of the assets invested in the U.S. equity markets, but number just over 30 out of the tens of thousands of funds that invest in the U.S. equity markets.
The following are the managed care company stocks that these mega fund managers are most bullish about, that are undervalued compared to the peers in their group (see Table):
Humana Inc. (HUM): HUM provides managed healthcare services through HMO, PPO and government contracts to over 11 million members in the U.S. Mega funds together added a net $338 million in Q4 to their $5.13 billion prior quarter position in the company, and taken together mega funds hold 40.7% of the outstanding shares. The top buyer was mutual fund powerhouse Fidelity Investments, with $492 billion in 13-F assets ($269 million), and the top holders were JPMorgan Chase & Co., with $1.3 trillion in assets under management ($881 million), and Vanguard Group, with $1.6 trillion in assets under management ($746 million).
HUM shares plunged Monday by about 8% after the company released a surprisingly poor Q1 (March) quarter in which it missed its earnings estimates ($1.46 v/s $1.53), while narrowly beating its revenues estimates ($10.22 billion v/s $10.21 billion) and raising slightly forward earnings guidance for FY 2012. HUM shares currently trade at 9 forward P/E and 1.8 P/B compared to averages of 11.0 and 2.1 for its peers in the HMO group, while earnings growth is expected to continue on its upward trajectory, projected to rise from $6.60 in 2011 to $8.93 in 2013 at an annual growth rate of 16.3%. HUM has among the most consistent earnings growth trajectories in the group, and a track record of consistently beating earnings estimates. Thus, given its attractive valuation, especially after the plunge Monday, the company looks like an attractive buy at these levels, and particularly on a dip into the mid-$70s.
Cigna Corp. (CI): CI is a global health services company and the fourth-largest health insurer in the U.S. market based on enrollment. It operates healthcare, group disability and life segments in the U.S.; and its international business sells individual insurance in several countries and provides coverage for people living outside their home countries. Mega funds together added a net $173 million in Q4 to their $4.22 billion prior quarter position in the company, and taken together mega funds hold 32.6% of the outstanding shares. The top buyer was Fidelity Investments ($245 million), and top holders were Wellington Management, with $254 billion in 13-F assets ($595 million), Vanguard Group ($527 million), and Fidelity Investments ($520 million).
CI shares too traded lower, down more than 1%, as the group moved lower in sympathy with the plunge in HUM shares (see above). CI is expected to report its Q1 this week, on Thursday after the market closes, and its shares currently trade at 7-8 forward P/E and 1.6 P/B compared to averages of 11.0 and 2.1 for its peers in the HMO group.
The following are some additional managed care company stocks that mega funds accumulated in Q4 (see Table):
- Amerigroup Corp. (AGP), a multi-state managed healthcare services company serving people, who receive healthcare benefits through publicly funded health care programs, including Medicaid, Children's Health Insurance Program (CHIP), Medicaid expansion programs, and Medicare Advantage, in which mega funds together added a net $84 million in Q4 to their $1.39 billion prior quarter position in the company; and
- Molina Healthcare Inc. (MOH), a provider of managed healthcare services to 1.6 million members via government-sponsored programs for low-income families, in which mega funds together added a net $21 million in Q4 to their $302 million prior quarter position in the company.
Besides these, mega funds based on their Q4 trading activity indicated that they are bearish on the following stocks in the managed care group (see Table):
- UnitedHealth Group Inc. (UNH), that is a diversified health and well-being company, serving more than 70 million Americans, in which mega funds together cut a net $504 million in Q4 from their $27.36 billion prior quarter position in the company;
- Wellpoint Inc. (WLP), a provider of managed healthcare services through PPO, HMO and POS, indemnity and other hybrid plans to 33.3 million members, in which mega funds together cut a net $171 million in Q4 from their $8.19 billion prior quarter position in the company;
- WellCare Health Plans (WCG), a provider of managed care services for government-sponsored health care programs in the U.S., in which mega funds together cut a net $113 million in Q4 from their $1.28 billion prior quarter position in the company;
- Aetna Inc. (AET), a diversified U.S. health care benefits company offering a range of health insurance products and related services, including medical, dental, pharmacy, behavioral health, group life, and disability plans as well as medical management capabilities and Medicaid health care management, in which mega funds together cut a net $100 million in Q4 from their $5.70 billion prior quarter position in the company; and
- Coventry Health Care Inc. (CVH), that is a provider of managed healthcare services through HMO, PPO and POS plans, and Medicare and Medicaid products, in which mega funds together cut a net $11 million in Q4 from their $2.10 billion prior quarter position in the company.
General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.
This article is part of a series on institutional holdings in various industry groups and sectors, and other articles in the series for this and prior quarters can be accessed from our author page.
Credit: Fundamental data in this article were based on SEC filings, Zacks Investment Research, Thomson Reuters and Briefing.com. The information and data is believed to be accurate, but no guarantees or representations are made.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.