Guest Contributors

This simple question, posed by legendary value investor Bruce Berkowitz, puts the consensus concerns surrounding the managed care industry into perspective. The bottom line is that the health insurers are the only shot we have at managing this mess. As much as he might like to, Obama does not have another entity to do it. And our growing government does not have the expertise or efficiency to manage the process. The bear case for these stocks is well known and well discounted even at today’s levels. Let’s take Humana (NYSE:HUM), for example – 60% of the analysts that cover the company rate it “hold” or worse. To help put this number in perspective, a whopping 1% of the S&P 500 is rated “sell” today. So suffice it to say that the “bad stuff” is in the price. And when the bar is set low enough, it is not difficult to surprise on the upside. Perhaps this is why earnings estimates for the company have been marching steadily higher in recent months. So let’s consider some of the potential “good stuff” that might shift sentiment in the period ahead:

February was a good month. The S&P500 companies reported good Q409 results, with 75% of the constituents beating earnings estimates, and 10% meeting. In addition, the overhang of the widely unpopular health care reform seemed cleared, with Republican candidate Scott Brown elected to the Senate, ending the Democratic Party’s 60-vote filibuster proof majority. Investors’ optimism rose, sending the S&P500 index up by 4%, largely reversing the loss in January. High beta stocks led the way, with the top quintile stocks outperforming the R1000 and R2000 indices by 2.21% and 4.14% in the past month. (Equal weighted return. Please refer to What’s Working portion of the letter.)This has certainly been a much more pleasant start to the New Year compared to 12 months ago. A year ago, we were on a roller coaster ride, witnessing the S&P500 losing 8.6% in January, the worst in history, losing 11% in February, the second-worst on record, followed by a loss of 4.66% on the first trading day of March, another worst in history. Back then, we were attacked by horrific economic news on one front after another: a disheartening GDP decrease of 6.2% in Q4 2008, skyrocketing unemployment, falling home sales and prices, rising credit card defaults, and continuing banking troubles. Amid debates on the merit of “capitalism”, investors were dumbfounded by government’s plans to “save” the economy: the $787 billion stimulus bill, the Homeowner Affordability and Stability Plan, and the President’s ambitious budgets suggesting historical deficits for the country. The Federal Reserve made its own contributions to the rescue efforts, injecting $1.75 trillion into the economy starting in March 2009, including purchasing $1.25 trillion of agency backed mortgage securities and $300 billion longer maturity treasuries.

A list of the most attractive stocks in Japan from within the Nikkei 225 index. Using AFG’s valuation techniques we screened down the Nikkei 225 to the 25 most attractive stocks that are more likely to outperform their sector peers. As a further layer of analysis we removed those companies that met AFG’s Valuation criteria that also had a high level of accruals which AFG has proven to cause firms to become more vulnerable to negative earnings surprises.

The 25 most actively traded stocks in the S&P 500 based on trading volume, ranked by valuation and investment opportunity attractiveness. These companies seem to garner the most attention from within the investment community, so we decided to add our insights into which of these firms look attractive and worthy of the hype and which you may want to avoid.