Health Insurers Triple S&P 500 Returns

By Josh Lipton In the past month, while violent unrest in the Middle East and North Africa has dramatically dominated the investment headlines, strategists note that one sector has quietly emerged under the radar: Health Care. In fact, month-to-date, the S&P 500 is down .41%. However, there are three sectors that are up: Industrials (.06%), Consumer Staples (.34%), and Health Care (1.3%)

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Morningstar analysts note that the Health Care sector had the worst performing stocks in 2010, thanks largely to the “fear, uncertainty and doubt” overhang created by the reform legislation signed into law early in the year. However, in 2011, the story line is changing. Health Care stocks look to be healing, but what's interesting is where the strength is emerging. Using exchange-traded funds as proxies, it's clear that drug makers aren't leading the charge. The iShares Dow Jones US Pharmaceuticals Index Fund (IHE) -- which includes holdings like Merck (MRK) and Eli Lilly (LLY) -- is up just 1.4% this year. Biotechnology isn't going blockbusters, either. PowerShares Dynamic Biotechnology & Genome Portfolio (PBE) -- with holdings like Illumina (ILMN) and Biogen (BIIB) -- is down 3% year-to-date.

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Instead, it's the health insurers that are making the big moves. Jon Markman of Markman Capital Insight points out that these companies performed great in 2004 and 2005, with some of the leading companies up 100% in that two-year span. These stocks were clobbered from 2006 to 2009, losing around 60% of their value, but, as Markman notes, they now seem quite perky again. Indeed, the iShares Dow Jones US Healthcare Providers Index Fund (IHF) -- an ETF packed with companies like UnitedHealth Group (UNH), WellPoint (WLP), Aetna (AET), and CIGNA (CI) -- is now up a whopping 14% so far this year. That's nearly triple the performance of the broad market. The appeal of this subsector remains multifaceted, say health care analysts. For one, many of these companies, despite the run up in their stock prices, still look pretty cheap. “Valuations are attractive,” says Jason Gurda of Leerink Swann, a health care-focused investment bank.

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Specifically, the analyst points out that the group is now trading at about 10 times projected earnings. That's above the P/E of 9.2 at the close of the third-quarter earnings season, he says. However, it's still below the 5-year average P/E of 11. Les Funtleyder, portfolio manager of the Miller Tabak Health Care Transformation Fund (MTHFX), also notes that regulatory uncertainty surrounding the sector has receded while the earnings and revenues at these companies have kept improving. “This is the one group in health care that has seen upward revisions in earnings,” the strategist says, adding that he owns UnitedHealth Group and Humana (HUM) in his fund. Analysts note that the health insurers steadily beat earnings estimates and raised their guidance each quarter in 2010 and, more importantly for investors, their forecasts for the year ahead have now continued to mostly best the Street's predictions.

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