The conventional wisdom has been that health insurers should do better as long as the path to health care reform gets stickier. With Democrats no longer holding the Senate majority needed to ramrod legislation through the process (whoever said that sausage is similar to laws, in that neither should be seen being made, is brilliant), health care reform is in jeopardy.
So, naturally the big-name insurers surged on the election of Republican Scott Brown in Massachusetts, right? Well, not exactly.
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The sector was dragged lower along with the rest of the market, unable to fight the wave of selling that washed over all stocks (sort of a “sinking tide lowers all boats” deal).
Wednesday, however, we saw WellPoint (WLP) beat the Street’s quarterly earnings estimate, although it issued a cautious outlook for 2010 based on lower-than-expected Medicare reimbursements and fewer enrollees in employer health plans. UnitedHealth Group (UNH) also beat its earnings estimate the week before. Interestingly, both stocks have retreated to their 20-day moving averages, trendlines that have supported several pullbacks in the past couple of months.
Up next week are two more major players — CIGNA (CI) and Aetna (AET). Both have mixed sentiment readings. CI has only 39% “buys” from analysts, while AET has 58% but also sports three “sell” ratings. Option activity isn’t telling us much, and short interest is low on both.
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Of the pair, we prefer Aetna for two reasons. The first is that it moves after earnings. In three of the past four quarters, CIGNA hasn’t moved more than a percent during the week following earnings. It’s hard to make money using options with no movement, unless you’re a seller. AET, on the other hand, has moved an average of 7% in the week following the past four earnings reports, something an options player can seek its teeth into.
The other reason I prefer Aetna is earnings expectations. Analysts look for CI to nearly double its profit from a year ago. That’s a tall order, despite the year-ago figure being the lowest in five years.
Expectations for AET are far more modest. Actually, that’s putting it mildly. After reporting profit declines of 38% and 28% the past two quarters, analysts call for a 56% drop in the latest quarter. In fact, the expected 42 cents is the lowest in five years. That should be an easy bar to clear.
I also like how Aetna’s chart is setting up. A pullback to the $30 level should provide support, both from the 100-day moving average and the heavy put open interest at the $29 and $30 strikes.
Note in the chart below how $30 provided staunch resistance in November and December, another indication of the power of this level.
Of course, AET could succumb to a continuation of the selling that has ruled for the past week. But if the market stabilizes, the health insurers could be due for a bounce.
With an earnings report due next week on Feb. 5, a modest expectational backdrop, and a history of strong moves following earnings, look for Aetna to lead the way higher, and consider buying calls on the stock ahead of the announcement.
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