Hedging your bets is one of the most underrated clichés when it comes to investing. Many investors try to find penny stocks that can accumulate double and triple gains in a short period of time. However, these stocks have a high propensity of failing. In order to prevent any dramatic negative change in share price, it is wise to have a large-cap value equity in your portfolio. One of these recommended companies would be WellPoint Inc (WLP). The 48.5 billion dollar equity is one of many large-cap stocks in the Health Care Plan industry. Many investors claim that companies like UnitedHealth Group or CIGNA may be better purchases, because of name recognition. However, after reviewing WellPoint's fundamental and strategic background, it is assured that this company will outperform its relative competitors.
WellPoint's business plan is the first reason why it is a great purchase. According to Reuters, WellPoint, "a commercial health benefits company serving approximately 34 million medical members." Although the corporation is located in Indiana, the company and its subsidiaries can be found across the United States through its licensed program Blue Cross and Blue Shield and its other program UniCare. As the population continues to age and baby boomers continue to retire, there will be an immense amount of demand for medical plans. Throughout the past two years many of the industry leaders have reaped the benefits from this situation, and the positive news will continue well into the next decade. UnitedHealth Group has grown 20% in terms of share price and WellPoint has grown 30% during the same time period of two years. Some investors may advocate taking some profit off the market, but with the future looking extremely bright for this industry--especially for large, well defined equities--there should be no reason to avoid giving heed to WellPoint.
Nevertheless, another argument may be made that WellPoint has the same business plan as all of the other competitors in its industries. This statement is true, but what really distinguishes WellPoint from similar market leaders like UnitedHealth Group, CIGNA, and Aetna is the fundamental background. Looking at the top line, WellPoint over the past year, quarter-by-quarter has seen growth over 28.9%. UnitedHealth's same statistic is only 8.3%, CIGNA's number is staggeringly low at 0.3%, and Aetna's figure is not available from the source of Capital IQ. This number has transcended to a 90.5 revenue share for WellPoint, easily beating out UnitedHealth and Aetna. Going down the income statement to the bottom line, WellPoint has seen net income grow year over year, quarterly at 22.9%. UnitedHealth has only seen a 4% same-figure growth, and CIGNA is only at a mellow 10.5% growth rate. WellPoint has not only seen the benefits of its earnings and revenue in its accounting statements, but relative to its price as well. As the company currently trades at 79.20, its forward P/E ratio of 12.4 makes the company undervalued compared to the industry's 17 multiple average. This number is also below UnitedHealth's 13.6 multiple, CIGNA's 12.8, and Aetna's 12.8 ratio as well. This company is undervalued from the most famous valuation technique and also undervalued from more profound multiples. Even with an enterprise value higher than its market capitalization, WellPoint's other ratios still are outstanding. The company currently holds a price to sales ratio of 0.85. None of the other aforementioned companies can compete with this number, because they all have the same statistic above 0.90. In reference to enterprise value to revenue and enterprise value to EBITDA, WellPoint's respective numbers of 0.88 and 8.5 are also below or very similar to UnitedHealth and CIGNA and only marginally higher to Aetna's respective figures. However, Aetna is trading a 50% increase of enterprise value to market cap, while WellPoint is trading at a 4% deficit, and the numbers are much more comparable than seen at first glance. Therefore, with the given statistics, there is definite evidence to support that WellPoint is undervalued.
However, there may be some question about WellPoint's high enterprise value. Nevertheless, much of this can be attributed to the recent entry to the public markets, allowing for more debt to be accumulated. Its 0.78 current ratio is low compared to competitors, but its total debt to equity is quite low at 0.28 for the industry, and this number even beats out the same figure of UnitedHealth and CIGNA. Another question may be directed at WellPoint's lower-than-industry average ROE of 12.5%. The industry has an average of about 17% and each of the aforementioned corporations has a number greater than WellPoint. Many investors may blame the management team led by CEO and President Angela Braly. Even more concern can be made because of the recent acquisitions WellPoint made of Lumenos and WellChoice, and how these purchases will lead to more revenue potential. Nevertheless, once again, the company is still fairly new and will need some time to produce equity returns similar to that of UnitedHealth or CIGNA. WellPoint currently has an ROA and ROI both close to the industry average, and should have no problem raising its ROE to a similar market position in the next few years. Currently, WellPoint needs to focus on growing its sales and cutting costs so it can earn the respect of more institutional investors. However, the company is doing so and should continue to see high operating margin growth as it has seen in the past three fiscal years.
Therefore, WellPoint is simply undervalued compared to the rest of its competitors. In addition, the company has great growth potential as well. The same may be said about all the corporations in this industry, but WellPoint's PEG, with growth estimated for the next five years, is not only below the magic number of one, but below both CIGNA and UnitedHealth's respective numbers. The company does not offer dividends to entice investors, but it is currently trading below its 50 day SMA and investing in the stock now will reap even more benefits than a few months or years from today. There is no argument that medical plans will always be in demand. But demand will be outrageous five to ten years from today, and now is the perfect opportunity to use this foresight for your financial benefit.
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