Following company-specific missteps in the first half of the year, health insurance providers or managed care organizations (MCOs), have been laggards relative to other sub-sectors in 2012. On the heels of improved earnings for the group in the third quarter, S&P Capital IQ sees better earnings and share price performance in 2013.
"While individual and commercial enrollment for the group as a whole has declined over the past few years, given high unemployment rates and reduced affordability amid the tough economy, some MCOs have been realizing higher individual and/or commercial membership through market-share gains or acquisitions," said S&P Capital IQ in a new research note. "Most have also been realizing rising Medicare Advantage enrollment, as well as rising Medicaid enrollment, as states transitioned their Medicaid populations to managed health care to help save money."
While S&P is forecasting similar enrollment trends next year as have been seen over the past three years, the research firm sees "double-digit, group-wide EPS growth."
One ETF investors can use to play a potential rebound in MCOs is the iShares Dow Jones U.S. Healthcare Providers Index Fund (NYSE: IHF). In the 2012, the iShares Dow Jones U.S. Healthcare Providers Index Fund has not been a laggard, posting a gain of 18.3 percent to this point in the year. S&P Capital IQ rates IHF Overweight.
Home to 45 stocks, IHF has nearly $230 million in assets under management and an annual expense ratio of 0.47 percent. Dow component UnitedHealth (NYSE: UNH) and Express Scripts (NASDAQ: ESRX) combine for nearly 26 percent of the ETF's weight. Other top-10 holdings include WellPoint (NYSE: WLP), Humana (NYSE: HUM) and DaVita Healthcare Partners (NYSE: DVA).
As of the end of the third quarter, Warren Buffett's Berkshire-Hathaway (NYSE: BRK-A) owned over 10 million shares of DaVita. S&P Capital IQ has a four-star rating on UnitedHealth.
In the same note, S&P Capital IQ reiterated an Overweight rating on the Health Care Select Sector SPDR (NYSE: XLV), the largest health care ETF. XLV is heavily weighted to pharmaceuticals names such as Johnson & Johnson (NYSE: JNJ) and Pfizer (NYSE: PFE), but the ETF does hold some MCOs. For example, UnitedHealth and Express Scripts are found among XLV's top-10 holdings. XLV has surged 18.6 percent year-to-date.
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