Health Insurers: All Eyes on Massachusetts

“Cigna, United Health, Humana, all hitting 52-week highs today. Certainly everybody waiting with baited breath to find out what happens with the US Senate special election.” — Fox Business Network 1/19/2010

Large cap health insurance providers are proving to be some of the hottest stocks in today’s market, as a hotly contested Senate seat hangs in the balance. Most everyone is aware by now that a special election is being held in Massachusetts for the seat vacated by the death of Sen. Ted Kennedy. Political pundits are calling this vote a referendum on the President’s agenda as a republican candidate has polled better than most would have expected in a deeply blue state. If the voters elect the republican, Scott Brown, it would send a clear message to Washington regarding health care reform and would also break the Democrats 60-seat filibuster proof majority.

It seems that a possible victory by the republicans and the effect it would have on national politics are being cheered by the market. All of the largest health insurers are surging today with Aetna (AET) as well as Humana (HUM) up 4%, and Coventry Health Care (CVH) up 5% as well. As a group (according to Google Finance) the Insurance (accident & health) sector is trading 3.81% higher in afternoon trading. However, it is worth mentioning that these stocks have easily outperformed the S&P 500 over the last six months as well, even with the prospect of health care reform looming over their heads; the insurance sector is up 38% compared to just 18% for the S&P 500.

The truth is that no one really knows how the proposals being thrown around in Washington will affect insurance providers simply because the landscape changes so rapidly. As you can see from our graphical representation of the sector, we have an Undervalued rating on many of the largest health insurance providers. However, we hesitate to recommend any stock whose prospects have the potential to be dramatically shifted by political currents. If Brown can come out on top in Massachusetts, we would expect health insurer stocks would get a boost as their would be less of a threat to future earnings.

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