Sunday, July 1, 2007

Health Care Plans: By the Numbers

In this article, we look at different Health Care Insurers (targets of Michael Moore's "Sicko" movie) and look purely at the raw numbers. (Data taken from Yahoo Finance on Friday, June 29, 2007):

SymbolStock NameMyPEGForward PE5 yr growthYield
HUMHumana0.23 12.6918.33%0%
MOHMolina Healthcare0.4614.4613.00%0%
HNTHealth Net0.5612.7513.71%0%
WCGWellCare Health Plans0.5916.7016.90%0%
UNHUnitedHealth Group0.6512.9816.14%0.10%
SIESierra Health Services0.8315.6315.33%0%
MGLNMagellan Health Service1.1120.8416.48%0%

In order to understand the chart, we have to understand the different elements.


MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link. MyPEG incorporates the yield and cash per share.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).


The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

SymbolStock NameEV/EBITDA%Short%Inst. Own
MOHMolina Healthcare3.61113.90%48.50%
HNTHealth Net5.6871.30%92.20%
WCGWellCare Health Plans8.61412.80%106.60%
UNHUnited Health Group7.8740.70%85.60%
SIESierra health Services10.3093.80%79.70%
MGLNMagellan Health Services7.3998.60%104.30%


Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.

% Short

The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".

% Institutional Ownership

People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.


Based on all this and based on just the numbers, the entire group looks to be inexpensive as a whole. Humana (HUM), Aetna (AET), and Molina Healthcare (MOH) look to be good values, having an EV/EBITDA of 5 and under, and the MyPEG having values less than .50. All three stocks have a lot of cash per share, and Aetna (AET) and Molina (MOH), both have debt to equity (not listed above) less than .26 (very good).

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