Wednesday, July 23, 2008

Managed care: Buy em!

Anybody notice this beauty on WellCare by S&P last week? It was downgraded to Strong Sell with a $23 target. Read it yourself:

SNPMarketScopeResearchNotes2008-07-10 14:21:29.00 WCGWELLCARE HEALTH PLANS P.Seligman S&P DOWNGRADES SHARES OF WELLCARE HEALTH PLANS TO STRONG SELL FROM HOLD We see WCG under pressure from the U.S. Senate bill that would eventually cuts payments to Medicare Advantage plans. We believe the bill will overcome a potential presidential veto. Managed care firms' MA Private Fee-for-Service plans will have to contract with providers by 2011 and we view it as difficult for WCG to build provider networks in its newer geographies. Also based on high Medicare cost trends as cited by peers, we cut our '08 EPS estimate $0.60 to $4.50. Seeing no catalyst, we sharply reduce our forward P/E from 10X to below-peer 5X and target price by $28 to $23.

No catalyst? Wellcare was raided by the Feds because of Medicare payment suspicion, and the entire restatement is about $46 million.

So the market lopped off $4 billion of market value on WCG the past year, sending the stock under the amount of cash on it's balance sheet, because of these worries, and now, after 100 points have been lopped off, an analyst says he sees no catalyst.

Which is why WCG popped $7.02 yesterday to 36.25. But WellPoint (WLP 48.75) reports today. They'll beat their numbers, just like United Health (UNH 26.21) did yesterday. Aetna (AET 36.21) and Humana (HUM 40.60) can be bought also.

The panic in these stocks is over!

Here's the script that Wall Street will spin. MCO costs (Managed care costs) were miscalculated and now they are under control. When the economy recovers, more employees will be working, and thus more revenue for the companies, eventually boosting MCR's (Medical Cost Ratio's)blah blah blah....

Or you can just disregard Wall Street and read the following paragraph.

HUM moves first and fast because it is the "derivative" play on WLP's earnings. AET is next, and UNH picks up at the rear. The play on UNH is with longer dated calls as they have very little premium.

How tough is that?

No comments: