While the health care sector started 2009 off on the right foot, recent developments in Washington D.C. have quickly brought the group to its knees. On Feb. 23, Humana (HUM) warned that preliminary Medicare Advantage payment rates for 2010 would have a "significant adverse impact" on 2010 premiums for Medicare Advantage members.
Adding to the sector's woes, some analysts are speculating that President Obama's budget could cut significantly into the Medicare HMO funds put in place by the Bush administration. According to those analysts, these cuts in Medicare Advantage could eliminate 10% of the money that HMOs get from the government for covering Medicare patients.
Since Humana fired the first warning shot, the Morgan Stanley Healthcare Providers Index (HMO) has plunged more than 30%, saddling the exchange-traded fund with a year-to-date loss of 24%, compared to the S&P 500 Index's (SPX) decline of approximately 18%. Within the group, MetLife (NYSE: MET, Stock Forum) has emerged as an underperformer, plunging more than 52% since the beginning of 2009.
Technically speaking, the security has lost an impressive 71% during the past 52 weeks. Furthermore, since mid-October 2007, the stock has fought a losing battle with its declining 10-week and 20-week moving averages. These intermediate-term trendlines halted MET's rebound from its November 2008 lows in early January, and the shares have since turned sharply lower - fueled by speculation on the Obama budget.
Most disturbing for MET bulls, however, is the fact that the rejection at the stock's 10-week and 20-week trendlines has forced the shares below their November lows. MET is now trading below $16 per share for the first time since April 2000. The next level of potential technical support for the security resides near 14.31 - site of the stock's low following its initial public offering on April 5, 2000.
On the sentiment front, options players remain heavily bullish toward the equity, despite its abysmal price action. Specifically, MET's Schaeffer's put/call open interest ratio (SOIR) of 0.74 indicates that calls outnumber puts among near-term options. Furthermore, this reading falls below 95% of all those taken during the past year, meaning that options speculators have been more bullish only 5% of the time in the prior 52 weeks.
Furthermore, data from the International Securities Exchange (ISE) and the Chicago Board Options Exchange (CBOE) reveals that calls bought to open on these exchanges have outnumbered puts purchased during the past two weeks. This ratio ranks above 73% of those taken during the past year, underscoring the speculative options crowd's belief that MET will rebound in short order.
Digging into MET's open interest configuration, peak call open interest resides at the deep out-of-the-money March 20 strike, totaling more than 8,400 contracts. Meanwhile, peak put open interest for the March series rests at the deep in-the-money 25 strike, numbering about 4,700 contracts. This attention for overhead call and put open interest indicates that options traders do not expect MET to fall much further.
Elsewhere, roughly 3.3% of the stock's float is sold short. But short interest jumped more than 12% during the most recent reporting period, indicating that short sellers are beginning to take note of MET's technical troubles. Should the shares extend their losses below the 16 level, it could embolden these bears, thus sparking an influx of short selling that could pressure the stock sharply lower.
Finally, Wall Street has ample room for potential downgrades or price-target adjustments. According to Zacks, analysts have doled out 11 "buys," 3 "holds," and no "sell" ratings. Meanwhile, Thomson Financial reports that the average 12-month price target for MET rests at $40.07 per share - a 166% premium to the stock's current trading range near $15 per share. Should the brokerage bunch become disillusioned with the shares, downgrades or lowered price targets could create additional selling pressure for MET, forcing the stock even lower.
By Joseph Hargett