Updated from 3:42 p.m. EDT

Analysts keep trying to talk HMO stocks out of their recent doldrums. It wasn't working Friday.

In recent trading, UnitedHealth ( UNH) was off 1.2% at $85.20, Aetna ( AET) was behind 2.5% at $42.01, Wellpoint ( WLP) was lower 0.6% at $70.29, and Oxford Health ( OHP) was losing 3.8% at $38.03.

From their lows in September, managed health care shares rallied sharply through June. Over that period, the four HMO stocks listed above plus Humana ( HUM) (down 3.9% to $11.93 Friday) gained 61.4%, on average, but have lost 19%, on average, since that time. During their ascent, consolidation among insurers unleashed a potent period of premium expansion, which fattened margins while most of the rest of the economy suffered.

Friday's drop comes even as analysts upgraded their earnings guidance for managed care providers Aetna and Oxford Health. Bill McKeever, an analyst at UBS Warburg, boosted his 2002 estimates for Aetna to $1.48 a share from $1.30, noting improvements in premiums and costs. And he raised his forecast for Oxford Health to $3.45 a share from $3.40, describing higher-than-expected enrollment.

Still, the stocks aren't cheap, and some don't see trends improving enough to sustain the multiples. "The group has done extremely well because costs were rising. And so, insurance premiums stayed ahead of them," said David Shove, an analyst at Prudential Securities. "But I think costs are moderating."

According to Shove, health care costs typically lag an economic slowdown by 12 to 18 months. As a result, he thinks multiples will have to adjust for a deceleration in premium growth rates.

Some analysts believe that medical costs and insurance premiums will keep up for a while, however. "The early indication on costs and premiums continues to be favorable," said Michael Baker, an analyst at Banc of America Securities. "My expectation is for a nice uptick in 2003."

In Baker's view, any lag could be offset by employers who subsidize health care costs. "There is still some cushion for the employer to step up and redirect dollars on health care," said Baker.

For the second quarter, Aetna received premium yields of 18.5%, while costs grew 15%, creating a profitable spread. But based on McKeever's 2003 estimate of $2.43, the stock trades at 17.7 times earnings, which is a significant premium to the rest of the group's 13 times.

McKeever maintains a hold recommendation on Aetna, because of its rich valuation.

The analyst is more optimistic about Oxford Health, even though it was most directly exposed to a weak New York economy following the Sept. 11 attacks, because of its positive enrollment trends. Management expects enrollment to grow 6% for the year, compared with previous guidance of 4%.

In addition, Oxford, which trades at 11 times McKeever's 2003 estimate of $3.95, is less expensive than Aetna and at a 15% discount to the price-to-earnings multiple of the managed care industry, he said.

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