Isn't it interesting how the Street can uniformly switch from being wrong about an industry because they underestimate risks, to hyper-focusing on those same risks? Such would seem to be the case with health-care plan operators like Coventry Health (NYSE:CVH) -- suddenly concerns like medical costs, membership growth, and pricing seem to matter again.
For its second quarter, Coventry announced that overall revenue climbed nearly 18% from last year, but was virtually flat on a sequential basis. Margins fell a bit, and though medical costs rose nearly 22%, the medical loss ratio actually improved slightly from last year. Membership growth of 3% was positive, though not dramatically so.
Have investors at last woken up to the reality that the managed care market won't continue its dramatic improvement indefinitely? There are only "x" amount of people in this country and only "y" amount of dollars to spend on health care. Barring significant market share growth by a single company (which would most likely come at the expense of pricing), there just never was a formula for eternal double-digit growth. But try telling that to people when everyone wants to own UnitedHealth (NYSE:UNH), WellPoint (NYSE:WLP), Aetna (NYSE:AET), and so on.
Now, though, the Street has gotten scared about what the companies can and will do to maintain growth. In the case of Coventry, the company has the advantage of a very good management team and a smaller base from which to grow. On the negative side, though, it is still saddled with digesting and turning around the First Health purchase, as well as competition with the Blues.
There could be long-term value here, but you may have to be patient to see it develop in the market. While Coventry's quality management is a good reason for long-term confidence, owning a stock in a sector that the Street has turned its back on can make for some frustrating times in the short run.
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UnitedHealth and Coventry Health are recommendations of Motley Fool Stock Advisor , where Tom and David Gardner are always on the lookout for the market's best investments. Try it out for yourself -- it's free for 30 days .
UnitedHealth is also an Inside Value recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
