Following last week's raid of WellCare ( WCG) and some weak forecasts from competitors, Humana ( HUM) is starting to look like the healthiest pick in the managed care sector.

Certainly, Humana's recent performance and guidance proved strong. The company's third-quarter profits surged 90% to $302 million, fueled by huge gains in its Medicare business. Excluding special items, earnings per share of $1.53 topped the consensus estimate by a full nickel. Moreover, the company's new 2008 guidance of $5.30 to $5.50 a share rests well above Wall Street's $5.17 target.

"Humana is the latest in a string of companies to report higher Medicare earnings and an optimistic 2008 Medicare outlook," CIBC World Markets analyst Carl McDonald noted on Monday. Ultimately, "Humana's third-quarter earnings should be enough to keep the stock's positive momentum going -- we think."

McDonald has a sector-perform rating on Humana's stock. The shares jumped as high as $81.50, setting a 52-week high, before settling back to trade down 41 cents at $75.15.

To be sure, Humana stands out from the pack. Notably, the company generates most of its earnings in the booming Medicare space and therefore relies far less than others -- including industry giants UnitedHealth ( UNH) and Aetna ( AET) -- on the sluggish commercial sector for growth. Moreover, with rival Medicare insurer WellCare under intense government scrutiny, Humana could be poised to capture even more market share down the road.

At the very least, Humana seems to face no similar investigation of its own.

"Speculation about an FBI raid roiled Humana's stock on Friday," said McDonald, whose firm seeks to do business with the companies it covers. "But the talk proved unfounded, as the company did not receive a visit. Nor is it aware of any investigation."

Now, "the big acceleration in Medicare enrollment growth Humana is looking for in 2008 will also be viewed positively" by the market.

Already, Humana's focus on Medicare has paid off well. The company's third-quarter sales climbed 12% to $6.32 billion -- handily beating a $6.21 billion consensus estimate -- due to Medicare enrollment gains. The company's Medicare Advantage program posted especially strong growth, with membership coming in a full 15% higher than it did a year ago. In contrast, Humana's commercial business remained sluggish with virtually no year-over-year gains at all.

Margins for Humana's Medicare business proved generous as well. While numbers were helped in part by special items, analysts estimate that Humana's government margins more than doubled those posted by its commercial division last quarter.

Taken together, those margins actually set new records for the company.

"Consolidated pre-tax income of $479 million represented a 7.6% margin," Credit Suisse analyst Gregory Nersessian noted, "up over 73% from the prior year and the highest quarterly pre-tax margin the company has reported in at least eight years -- or as far as our model goes back."

Humana believes that its future performance, boosted by further Medicare gains, will prove even stronger. All told, the company looks to add as many as 250,000 Medicare Advantage customers in 2008 -- or nearly twice as many as it expects to add this year. The company predicts some modest gains in its commercial business as well.

Nersessian, for one, likes what he hears.

"Humana continued its positive momentum and pattern of positive earnings revisions driven by stronger-than-expected performance in the government segment," he observed on Monday. Thus "despite high expectations into the quarter, Humana's 3Q07 performance and 2008 guidance should satisfy investors, and we look for the stock to trade higher" as a result.

Nersessian has an outperform rating on Humana's stock. His firm has investment banking ties to the company.