My Mistake With The HMOs

I generally do not buy cyclical companies whose earnings could swing wildly. I prefer buying companies where earnings are somewhat predictable. This allows me to use price to my advantage if the stock price goes down. In buying the HMOs I bought cyclical companies and I am paying the price for my decision.

Wellpoint was trading at less than 8 times 2013 earnings when I bought the stock plus they were planning to buy back over 10% of their shares outstanding this year. I believed the reason for the discount was Obamacare. Only 25% of their profits, small group and individual, is likely to be effected by Obamacare. I figured that even if 25% of the profits went away the stock price was still too low, which I did not believe would occur. Obamacare will bring more customers and likely more profits over time.

Early in the past decade, when the HMO industry was still  young, profits for the HMOs declined as they tried to expand too aggressively. Since then there has been consolidation and a lot of the profits have gone to shareholders rather than into expansion. It has been a decade long profitable run for the HMOs. But at the end of the day it is an insurance business and there is an underwriting cycle. It now seems that we have hit the top of that cycle as profits are declining.

I was caught long at the top of the cycle. This is precisely the reason I avoid cyclical companies. While I recognize my mistake I do not want to compound it by selling out at any price. If the market gives me an out I will take it but current prices are already pricing in a dire outcome so I am holding tight.

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