NEW YORK (Real Money) --Aetna (AET) is in the process of acquiringHumana (HUM) - Get Report while Anthem (ANTM) - Get Report is considering doing the same with Cigna (CI) - Get Report. As The New York Times recently put it: "The nation's five largest health insurance companies are circling one another like hungry lions closing in on prey."
It seems that the statewide marketplaces set up under the Affordable Care Act (i.e., Obamacare) are changing health insurance in ways that favor larger companies while creating new competitors, according to the Times.
Personally, I believe that the combination of the ACA, our aging population, new technologies and new medical approaches all point to a promising future for health care.
But considerable uncertainty surrounds the health insurance industry due to such concerns as increased government regulation and the need to contain costs. As a result, the sector isn't for the faint of heart.
Right now, three health insurers are attracting attention from my "guru strategies," the automated investment models that I've created based on how well-known Wall Street gurus typically invest.
Anthem provides network-based managed-care plans marketed under the Blue Cross and Blue Shield names, of which it's an independent licensee.
UnitedHealth sells a wide variety of health plans under its UnitedHealthcare banner, including some products marketed under the AARP name. UNH also owns Optum, which is in the business of providing health information, technology and consulting.
Employers Holdings is a specialty provider of workers' compensation insurance to such small businesses as restaurants.
My James P. O'Shaughnessy-based strategy likes Anthem and UnitedHealth. This strategy considers a company's market capitalization, earnings per share (which must have increased in each of the past five years) and price-to-sales ratio (which must be below 1.5).
If a stock passes all three tests, the strategy looks for the top 50 companies based on relative strength, or how well shares have performed in the past 12 months relative to the overall market.
Anthem and UnitedHealth easily pass all three tests and make it onto the top-50-companies list. Anthem has a $42 billion market cap, a steadily rising EPS and P/S ratio of 0.56. UnitedHealth has a $115 billion market cap, EPS that consistently goes up and a 0.85 P/S.
Employers Holdings is a favorite of my Peter Lynch-based strategy, which focuses on the price-to-earnings-to-growth ratio (or PEG). Looking at growth relative to the P/E ratio, this strategy measures how much an investor is paying for growth given a stock's current price. A PEG of up to 1.0 is acceptable and anything below 0.50 is exceptional.
Employers Holdings' PEG of 0.32 is in exceptional territory. Also in the company's favor is an extremely healthy equity-to-assets ratio of 19% (5% is the minimum required) and a 2.77% return on assets (nearly 3x the 1% minimum).
These three companies are in a market that's changing rapidly, which increases investment risk. But they're well performing, well run and a good match for investors looking to go out on a bit of a limb.
Editor's Note: This article was originally published at 2:22 p.m. EDT on Real Money on July 9.
This article is commentary by an independent contributor. At the time of publication, the author was long AET, CI, HUM and UNH.