Opinion, Outlook on Small Cap Insurance Brokers - CHSI, EHTH, CRVL, NFP
As we continue to make our way through the first real shakedown of what I believe is a new bull market, the cream is starting to rise to the surface. In other words, the rising tide isn’t lifting all boats equally. (Two cliches in the first paragraph? Impressive.)
Where are they?
As most of you probably know by now, I’m a big proponent of looking for the leading and lagging industries among the small cap realm (S&P 600 stocks). According to Bill O’Neill, almost half of a stocks’ performance can be attributed to its industry. And, I think a fair amount of it can be attributed to its size as well, meaning there’s a frequent disparity between the large and small caps in a particular group.
I’m also just as interested in the technicals as I am the fundamentals, since stocks don’t always trade at “what they’re worth”.
With that idea in mind, I’m going to use the next several work days to cycle through what I feel are the best and worst groups within the small cap universe. And yes, I’ll also ‘drill down’ into individual stocks.
On with the show.
Today’s chosen small cap industry and opinion? I’m bullish on the insurance brokers.
In short, I have a theory behind last year’s 95% plummet for this group - they were thrown in with the insurance companies, like AIG. However, with just a little digging, it’s not all that hard to figure out that a broker and an underwriter aren’t quite the same thing.
Oh, there’s crossover to be sure. By and large though, brokers don’t take on payout risks - they’re just the middlemen. As for the true small caps in the group, we’re talking about Catalyst Health Solutions, Inc. (CHSI), eHealth, Inc (EHTH), CorVel Corp. (CRVL), and National Financial Partners Corp. (NFP). However, there are a handful of other small caps I think you could reasonable add to the list of compelling ideas.
Anyway, the S&P 600 Insurance Broker chart caught my eye. These stocks are up from than 500% since November’s bottom, yet still have a ton of room to go before even testing prior highs. Tons of upward momentum.
And what about the underlying fundamentals? Not that they’re worth a lot, but they’re at least worth a look. (In some cases, a ‘0′ just means data wasn’t available.)

Interesting, huh?
While I’m relatively unimpressed by analysts and their guesses, it’s not like they’re always wrong or usually off-base. In fact, I think they generally have the right idea, even if they don’t’ see everything. In this case, even being marginally on target bodes well for the brokers - the group as a whole seems undervalued.
I’d still pick and choose carefully within the group. eHealth’s numbers, for instance, don’t look all that attractive. But, it seems you’ll at least have the wind at your back with most of these picks.
The industry opinions are great, but if you want specific trade recommendations, complete with entries and exits, then you want the free Small Cap Network newsletter. See the top of this page to register.



Why should the last month be any different for small cap airlines than the last year and half has been?
Life & Health Insurance
Owning small cap forestry and wood stocks - which only entails Deltic Timber Corp. (DEL) and Universal Forest Products Inc. (UFPI) - has been brutal this month. The S&P Small Cap Forest Products Index is down 21.4% for the month, and the month isn’t even over yet.



Here’s the even-bigger irony - investors who have placed bets on strong performance from biotech stocks have not only lost ground, they’ve underperformed the overall market. Year-to-date, the average biotech stock is down 16%, while the market is only down about 8%. This week, the average biotech stock is down 8%, while the market is up about 2%.
So, maybe it’s time to start stepping out of these names.
So, here’s my bottom line (or lines, in the case)…



Normally I wouldn’t jump on board the ‘obvious logic’ wagon train, as ‘obvious’ is also frequently ‘wrong’. However, I also uncovered this looming weakness before Tuesday.
The point is, I’m taking Tuesday’s hint at face value. Educational stocks are probably not where you want to be right now. You may even want to take on bearish trades in these stocks.


It’s not just the chart I’m digging though. The underlying results for these companies are compelling too. I don’t have time to get all the way into the rationale, so I’ll summarize it with a “now and later” look at their price multiples (a.k.a. P/E ratios). You’ll find that data in the nearby table.





The nearby table lays out Standard & Poor’s forecasted P/E’s for all the major sectors (as of November 4th). My strategy is a simple peer comparison. Basically, if I’m looking for undervalued stocks, the forecasted P/E (or even the trailing P/E) has to be as cheap or cheaper than the respective sector.