Surfing the Health Insurance Wave

The daredevil surfers of Hawaii like to get their boards out and ridewaves, while cowardly surfers (like yours truly) prefer to ride waves in the stock market. That's why I've been enjoying the insurance sector of health care recently. Don't look now, but it's experiencing a tsunami of gains. WellPointInc.  is breaking new ground -- fueled by stellar Q1 numbers. Aetna posted strong profit and sales growth in the latest quarter, helped by its acquisition of Coventry Health.

As funds load up, one thing is becoming crystal clear. This isn't your grandma's health care sector. Healthcare is no safe haven anymore, and picking the right stock is increasingly important.

Let's look at the two largest companies in the sector, in terms of where they could be headed.

UnitedHealth: Hesitation will cause your worst fears to come true.
Industry titan UnitedHealth Group's  earnings per share dropped 5% versus a year earlier in Q1. Revenue not only missed estimates, it was the slowest revenue growth for UnitedHealth in four years.

What happened? I'll use another catchphrase from surfing, because it's apt. When you hesitate in the face of a wave, your worst fears come true. UnitedHealth has been the most reluctant of the managed care companies to embrace Obamacare, and its hesitation almost caused a wipe-out.

There's a worse problem. Since the earnings came out, the company has blamed the Affordable Care Act, Medicare Advantage reimbursement cuts and even Gilead's blockbuster hepatitis C drug Sovaldi for the company's drop in earnings.

In short, UnitedHealth blamed everyone but the actual culprit--their own shortsightedness. (Notably, WellPoint, who budgeted more wisely for Sovaldi, suffered no losses, and actually said the drug was "more costly but offered improved outcomes." Improved outcomes being, of course, what health insurance is supposed to be about.

The takeaway for investors is that UnitedHealth's management is not doing at all well with the challenging regulatory environment in health care. Earnings are flattish for this behemoth, and until corporate management stops pointing fingers, that's not likely to change.

Unfortunately, this company has relied for too long on flexing its balance sheet muscle, technology and scale. To keep investors happy, they need to get off their high horse, get in the Obamacare ocean and start swimming.

Is WellPoint the shark in the water?
WellPoint doesn't fear the sharks in the Obamacare ocean. Maybe that's because WellPoint is by far the most aggressive player in health insurance, so you could consider them the biggest shark. WellPoint's aggressiveness bagged them a half million new subscribers, despite the disastrous rollout of the governmental exchanges.

I was never a fan of WellPoint until Joseph Swedish, the son of Eastern European immigrants who fled persecution during WWII, took over the company. Since then, there has been a huge change in the tone of the company, and it's all for the better.

Under Swedish, WellPoint was the first managed care company to adopt evidence-based medical guidelines. As pay for performance takes root in health care, WellPoint is poised to continue to prosper.

Despite being near its 52 week high, Wellpoint's raised outlook for 2014 makes me optimistic. The company beat in all of their last four quarters with an average beat of 12.35%.

Are there further catalysts ahead for this sector?
Medicaid plans should grow this year due to the Medicaid expansion, and of course there could be premium hikes as well -- which may hurt individual pocketbooks.

Some investors are trying to ease a feared coming dent in their monthly finances from ACA by buying managed care stocks. Not a bad idea, and so far it seems to be working.

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Cheryl Swanson owns shares of Gilead Sciences and WellPoint. The Motley Fool recommends Gilead Sciences, UnitedHealth Group, and WellPoint. The Motley Fool owns shares of Gilead Sciences and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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