These Stocks Are Ill, but Far From Dead

AS WHAT WASHINGTON CALLS HEALTH-CARE reform moves closer to reality, the Obama administration and many members of Congress have found an easy target: health insurers.

The health-care bill that recently passed the Senate Finance Committee would do little to control costs, Wall Street analysts say. Yet it would sting health insurers with higher taxes, while hurting profits -- by forcing the companies to insure individuals at set rates, regardless of their health condition -- and would levy only modest penalties on people who don't buy a health policy. This could create a situation in which many Americans would buy insurance only when they needed it. That would crimp insurers' profits, while eroding the underlying principal of insurance: that risk is shared by many -- the healthy, the very sick, and everyone in between.

Odds are good that legislation of some sort will be enacted. Wall Street, understandably, doesn't like much of what it sees, including what amounts to a $6.7 billion annual windfall-profits tax that could be imposed on health insurers as early as 2010. And lurking out there is the remote risk of extinction for the managed-care business if the U.S. moves to a single-payer, European-style system and muscles out private health insurers altogether.

But the worst-case scenarios are unlikely to materialize, and it often pays to buy out-of-favor industries. That's why some of the companies look like buys for patient -- and brave -- investors. The best of them could rise 25% or more over the next year.

MANAGED-CARE SHARES HAVE languished since the summer. The S&P managed-care index stands at half its late 2007 high, and the industry carries one of the lowest price/earnings ratios of any major group. The five major stocks -- UnitedHealth Group (UNH), WellPoint (WLP), Humana (HUM), Aetna ( AET) and Cigna (CI) -- trade at an average of only eight times estimated 2009 profits and eight times projected 2010 earnings. That's about half the P/E they've historically been accorded, and just over half the market multiple. Among the few industries with a comparable P/E are property-and-casualty insurers and major drug companies.

Charles Boorady, a Citigroup analyst, favors Aetna and WellPoint, while Goldman Sachs' Matthew Borsch likes Cigna and UnitedHealth. "Health-care reform will result in faster spending growth on health care. Almost nothing is being done to control costs," Boorady says.

Aetna, at a recent 25, is trading at nine times projected 2009 profits of $2.86 a share. Cigna, at 29, fetches seven times projected 2009 net of $3.85. UnitedHealth, at 25, trades at eight times estimated 2009 profits of $3.15 a share, while WellPoint, at 46, is at eight times projected earnings of $5.67 and Humana, at 37, commands just six times projected profits of $6.15.

A problem with the stocks is that they pay little or no dividends. "The capital management of this industry has been nothing short of disgraceful," says Leon Cooperman, the chief executive of Omega Advisors, a New York investment firm that holds UnitedHealth and WellPoint shares. UnitedHealth's dividend is just 0.1%; WellPoint has none.