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Larger, well-established health maintenance organizations as well as those that are likely takeover candidates are expected to be the best stock picks among HMOs, according to analysts.
Year-to-date, HMO stocks advanced 11.68%, according to an index of eight HMO stocks tracked by Business Insurance. This compares to a 6.49% increase for insurance industry stocks overall and a 1.26% hike in the S&P 500.
Stock analysts include among their favorites PacifiCare Health Systems Inc., United HealthCare Corp. and Oxford Health Plans Inc.
The HMO's stock market performance this year "has been very strong," said Todd Richter, an analyst with Dean Witter Reynolds in New York. "Stocks are not all the way back to the high set in the middle part of last year, but they're pretty close" and will continue to do well, said Mr. Richter, whose favorite stock is PacifiCare.
"I would say in general the HMOs have done relatively well," despite that health care services stocks as a group have been out of favor on Wall Street, said Ellie Kearns, a Boston-based analyst with Alex. Brown & Sons who recommends United HealthCare and Oxford Health Plans.
But, "there's definitely a tier" system, said Mark Jamilkowski, an analyst with Hartford, Conn.-based Conning & Co., discussing HMO stock performance. "You have the larger plans commonly associated with acquisition strategy. They have performed better than the small plans, which have languished with their more restrictive market expanse, limited geographic areas and perhaps less sophisticated systems and lower capital base."
For instance, companies such as PacifiCare, United Health Care, Aetna and Oxford, "clearly outperformed and continue to outperform" companies like Coventry Corp., Mid Atlantic Medical Services Inc. and Physicians Health Services Inc., Mr. Jamilkowski said.
"The stratification between the two groups is obvious and reflected in their stock market performance," Mr. Jamilkowski said. "The stronger companies have performed in line with the market or perhaps better
. . .whereas these other companies have not.
"And all in all, the returns on HMOs, I think, have been at market or slightly below market aggregate."
Their 1996 performance, Mr. Jamilkowski added, was "more an indication of how well the market performed in 1996 than the HMOs."
As for 1997, if the rest of the year follows the pattern established in the first three months, the HMOs are likely to outperform the market, said Mr. Jamilkowski.
Not everyone agrees.
"I think the stocks will only do OK with the exception of takeovers," said Michael Le-Coney, an analyst with National Securities Corp. in New York. "I think people have their eye on a couple of them that are clearly vulnerable" as takeover candidates.
"I think the ones I would buy would tend to be ones that would be taken over," he added. "I think many companies have simply decided there's a lot more work here to do than meets the eye and if you could sell the company at a decent price go ahead and do it." Mr. LeConey said these companies include Physician Corp. of American, Coventry and Physicians Health Services.
If margins are flat this year, it does not "augur for a massive outperformance relative to the market," said Gary Frazier, managing director at Bear, Stearns & Co. in New York.
However, if, as he believes, the HMOs could do better next year, some sort of a sustainable Wall Street rally three to six months in advance can be expected.
This means the stocks could begin to get traded up in the fall or winter as people start to place their bets on margin improvements in 1998, said Mr. Frazier, who recommends United HealthCare and WellPoint Health Networks Inc.