Should health plan stocks be dropping?
In a word, No.
The industry-specific event that triggered the recent selloff in health plan stocks was teh announcement by Wellpoint that they underpriced their premiums for certain products. This was followed by Humana's problem - their Medicare Part D program is under pressure due to higher utilization, and Coventry's statements to the effect that the flu bug was depressing their results.
The credit market debacle hasn't helped either.
I have no idea why markets move, or why a seemingly minor announcement about increased medical costs due to a flu problem (the very definition of a non-recurring event) would depress the earnings of an entire sector. If I bought and sold stocks (which I don't, my broker does with no input from me) I'd be buying these stocks for several reasons.
First, national health care reform is coming, and these health plans are going to have a huge growth opportunity.
Second, Coventry is one of the better-managed health plans, and their valuation does not reflect their demonstrated ability to consistently excel operationally.
Third, in an increasingly concentrated market, I'd expect the big guys to snap up the smaller ones - which will drive up their stock rices. The recent drop-off in prices should, if anything, make this more likely. That said, the volatility and tightness in the credit markets may make deals tougher to pull off.
Fitch (the ratings agency) opines that the industry's current EBITDA margins should remain around the 9% mark - consistent with past results