Zacks Industry Rank Analysis Highlights: United Health Care, Humana, Aetna and Wellpoint

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Jun 09, 2011, 09:30 ET

CHICAGO, June 9, 2011 /PRNewswire/ -- Stocks featured in this week's Zacks Industry Rank analysis include United Health Care (NYSE: UNH), Humana (NYSE: HUM), Aetna (NYSE: AET) and Wellpoint (NYSE: WLP).

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Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.

A Healthy Portfolio

Both the Hospital and HMO industries are somewhat larger than average in terms of number of firms, but neither is huge, at 9 and 18 firms respectively. The HMO industry is more concentrated than the 18 firms would imply. Four firms: United Health Care (NYSE: UNH), Humana (NYSE: HUM), Aetna (NYSE: AET) and Wellpoint (NYSE: WLP) control the bulk of the market, and often just one or two firms will have the vast bulk of the premiums in a given state.

They are in a tie for 17th place among the 256 Zacks "industries." Both have average scores of 2.33 (Strong Buy = 1, Strong Sell = 5), but are headed in slightly different directions. The HMO industry slipped two spots as its average rank rose from last week's 2.28. The hospital industry improved 10 spots as its average rank fell from 2.44.

The first table shows the hospital and HMO stocks that hold the vaunted Zacks #1 Rank (Strong Buy). The second table shows the Zacks #2 Ranked (Buy) firms. If the Zacks Ranks were random, one would expect that only 5% of the firms in an industry would be "#1s" and 15% would be "#2s".

That is not the case with the hospital and HMO firms. There are a total of 27 firms in the two industries. Four of them (14.8%) have number five ranks, and 11 (40.7%) have number four ranks. The four dominant HMO stocks are all large caps, but most of the rest and mid-caps, with a few small caps also available.

Even though these firms have generally been extremely strong performers so far this year, the valuations are still very reasonable, especially if you are willing to look forward to 2012 earnings. Keep in mind that the estimates are rising (a key to having a strong Zacks Rank). Since an estimate in motion tends to stay in motion, it is likely that these firms will actually earn more than the current consensus estimates are forecasting. That, in turn, means that the "real P/E" is even lower.

At this point, the most likely political case is gridlock over health care policy. That should allow some of the uncertainty over these stocks to dissipate. They just might prove the key to keeping your portfolio healthy.

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Contact: Dirk Van Dijk, CFA
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