HMO Stocks Look Like Bargains

HMOs are a beaten-up group that have recently suffered due to estimate cuts for 2008. Despite that, the newly revised EPS projections make this one of the most appealing industry groups for value seekers.

Here are the current numbers on four biggies in the group - United Health (UNH), Wellpoint (WLP), Aetna (AET) and Humana (HUM):

When the Value Line and Consensus EPS numbers differ, I use the lower figure.

click to enlarge both images

Thus all four firms are trading at big discounts to their historical P/E valuations even at their latest already reduced estimates. The present valuations of these companies do not seem to reflect their outstanding historical achievements or their projected growth into the reasonable future.

All four companies get high marks from Value Line for financial strength:

UNH....A+

WLP....A

HUM....A

AET.....A

Three get very good earnings predictability scores:

[100th percentile is best]

UNH.....95th percentile

WLP....100th percentile

HUM....75th percentile

All four companies are expected to post good growth in earnings for 2009.

Value Line projects more than a doubling in price for UNH, WLP, and HUM at their low-end 3 - 5 year target price range. Their high-end goals are triple today's quotes for that 2011 - 2013 time frame.

As of year-end 2007, UNH was held by 13 of our Gurus, AET by 7 Gurus and WLP by 10 Gurus.

Buffett was among those listed [owning shares of both UNH and WLP]. Needless to say, all these classic value investors bought their positions at much higher than today's levels making present quotes incredibly enticing.

Disclosure: I recently bought shares of UNH and HUM.

Comments

[Paul Price:]

Great take on a bargain group. I'm going to buy a few of these.

2008 Mar 20 09:07 AM

[johngonole:]

Hesitant to buy into this market but I've owned WLP in the past. I sold my shares I think about a year ago. I thought the PEG going forward was going to be high. At these priced the shares will be going for about or maybe just a little more than what I purchased them for years ago.

WLP seems really inexpensive to me. I"m going to buy some

2008 Mar 30 02:29 AM

[reming:]

Should HMOs really be publically traded, profit oriented organizations?? Call me old fashioned but is this really a good idea? Is the object of these companies to maitain the health of the individual buyer of the product or the buyer of the stock? Does holding down cost equate with holding down health care options? I have friends who are doctors and when I ask if they would subscribe to HMO's for their families healthcare, I get a resounding "no way". I'm all for free enterprise and responsible capitalism but, I don't believe that should include health care.

Mar 09 07:29 AM

[Tom Armistead:]

Prices for HUM relfect the recent CMS rate announcement for Medicare Advantage in 2010, only a .5% increase. But with 2009 guidance at 5.90-6.10 per share, and shares trading in the $24 area, I plan to buy some Monday.

Options implied volatility is very high, but should go down after CMS finalizes 2010 rates on 4/6. A covered strangle or straddle expiring in August looks good to me.

Mar 21 08:28 PM