by Richard Moroney, editeor Dow Theory Forecasts
Wall Street's concerns over patent expirations and regulatory roadblocks
are legitimate but don't negate long-term, overarching themes in the
sector's favor: the aging population, longer life spans, and early
Many health-care stock offer solid growth potential at
an attractive valuation. And managed-care companies look particularly
appealing. Here's a look at three buys in the sector.Aetna
has slumped 18% since declaring March-quarter results April 26. The
insurer posted its strongest sales growth in nine quarters, while
per-share operating earnings rose 18% and operating cash ?ow surged 78%.
At the same time it declared earnings, Aetna reiterated its
2012 pro?t guidance and suggested it might pursue a more aggressive
buyback strategy than previously planned for the last nine months of the
The company expects to add 300,000 customers this year, bringing membership to 18.2 million.
pullback leaves shares looking cheap at just eight times trailing
earnings, 22% below their ?ve-year average P/E ratio and 20% below the
median for managed-care stocks in the S&P 1500 Index. Earning a
Value score of 93, Aetna is a Focus List Buy. UnitedHealth Group
enjoys an attractive blend of strong operating growth, improving
outlook, cheap valuation, and favorable share-price action. All six
Quadrix category scores are above 55, while both sector-speci?c ranks
With 39.8 million members, the insurer is a steady
grower, producing eight straight quarters of at least 6% higher sales.
Operating cash ? ow has advanced in 12 of the last 15 quarters.
enrolled 1 million new customers in the March quarter — roughly in line
with the company's prior expectations for the full year. Now,
UnitedHealth sees membership up by 1.7 million to 1.9 million in 2012.
11 times estimated 2012 earnings, the stock trades 19% below the median
for S&P 1500 health-care stocks. UnitedHealth Group is a Long-Term
Buy. WellCare Health Plans
) is positioned to benefit if the Supreme Court upholds health-care reform in its current state.
proposed, the mandatory insurance would extend coverage to an
additional 30 million people, split about evenly between Medicaid and
A provider of managed-care services with more
than 2.5 million members, WellCare draws about 60% of its revenue from
Medicare and 40% from Medicaid.
Last month, WellCare agreed to
pay more than $137 million to settle law-suits related to overbilling
Medicare and Medicaid. In the wake of the settlement, WellCare may look
more attractive to a larger managed-care company seeking to boost its
exposure to Medicare and Medicaid.
However, we don't expect much
takeover activity in the group until a Supreme Court ruling on the
Affordable Care Act, expected in June or July.
Overall score and both sector-speci?c ranks exceed 95. The stock is
attractively valued at eight times trailing earnings, 40% below its
three-year average and 17% below its peer-group median.
market value of $2.42 billion, WellCare is a Best Buy. The stock is
volatile, and more risky than our typical recommendation.