Regardless of your political perspective, government involvement in healthcare – from the Medicare expansion to Obamacare – has been good for healthcare stocks.
BIG PICTURE
The Vanguard Health Care ETF – a ETF based on the MSCI U.S. Investable Market Health Care 25/50 Index – is up 135 percent since its 2009 lows.
This year is no different. Health care companies – from managed care to health care services to health benefit companies – have all done well. Aetna is higher by 41.2 percent as of Tuesday’s closing price; UnitedHealth gained 37.6 percent; and CIGNA rose by 52.8 percent – all this year.
But moving forward, if you want to keep those healthy profits (get it?) coming in, WellPoint (WLP) is where you will want to be. Using a debit spread, I am looking to make 108 percent on a short-term WLP options trade.
Before I get into that, let’s talk about why I like WLP on both a fundamental and technical basis.
THE CHART OUTLOOK
Technically, WLP is trading in the middle of its $84.15-$90.00 range – a range that has held the price over the past 30 days. Within that range, the stock sees support at $84.80, while it just closed Tuesday above recent resistance, previously at $87.70. The stock is also trading above the 50- and 200-day moving averages.
WLP’s short-term bullish technical indicators are supported by strong fundamentals, as well.
WellPoint’s second quarter net income was $800.1 million, or $2.64 per share, which included net investment gains of approximately $0.09 per share. The net income was also partially offset by a $0.05 per share cost related to the early termination notice of Amerigroup’s pharmacy benefits management contract. A year ago, net income was just $643.6 million, or $1.94 per share. This growth of 24 percent is extremely strong.
WLP’s trailing price-to-earnings ratio stands at 9.57, below the industry average and well below the S&P 500’s average of 18.59. The company is also currently trading below the preferable P/E ratio of 15x – a level that we consider the demarcation point between over and undervalued.
On a price/sales basis, WLP’s ratio of 0.39 is below the 0.69 average of its industry. The stock is also currently trading below its intrinsic value of $96.16, another reason to consider the stock underpriced.
WLP’s earnings per share over the last five years has increased by 8 percent. The current quarter earnings increased by 36 percent year-over-year, which is well above the required level of 15 percent.
WLP’s current price levels are at preferable levels, 3 percent below the 52-week high of $90.00.
OPTIONS STRATEGY RECOMMENDATION
Technical and fundamental indicators both show short-term bullish signals for WellPoint, suggesting that the price could move higher from current levels. Investors should consider the following debit call spread: Buy October 2013 $87.50 Calls and sell the October 2013 $90 Calls for a net debit to start is $1.15. We recommend holding until spread price reaches $2.40, which could happen if the price approaches or rises above $90 before October 2013.
Selling the higher-valued call allows you to mitigate some of the risk of the trade, roughly cutting the price in half. Simultaneously, it also limits the upside. At Tradespoon, we prefer these options strategies as they are good ways to quantify and manage both risk and reward.
