Southland HMO stocks poised to soar as details of reform surface.

Hammered on Wall Street this year with other health care stocks, health maintenance organizations' stock prices are now starting to recover and may boom in coming months, analysts said.

Uncertainty over proposed federal health care reforms battered prices of all health care stocks during the first quarter, but HMO stock prices are beginning to stage a comeback as investors recognize managed care organizations will play a significant role in any health care revamping.

In particular, poised to benefit from Wall Street's increasing confidence in HMOs are large companies with strong fiscal performances, some in Los Angeles and Orange counties.

Top picks of analysts and HMO experts: Cerritos-based FHP International Corp. and Cypress-based PacifiCare Health Systems Inc.

"At first you saw yo-yo prices with our competitors who are publicly traded," said Roger Greaves, chief executive of Woodland Hills-based Health Net. "But I think the people who follow these stocks recognize the importance HMOs will have. And I believe that HMO stocks will do nothing but go upward for the next couple of years."

With nearly 1 million members, Health Net is the second-largest HMO serving L.A. County. The largest is Kaiser Permanente, a nonprofit with headquarters in Pasadena and Oakland.

The HMO stock recovery comes as the investing public and the health care industry become more certain that HMOs will play a major role in, or possibly provide a blueprint for, President Clinton's final health care reform plan.

Development of HMOs, which have grown dramatically in the past 15 years, exploded during the late 1980s. HMOs contract with employers to provide medical care to employees at prepaid prices. California is a leader in HMO development and membership -- nearly one-fourth of all Americans enrolled in HMOs are Californians, according to PacifiCare.

Now, many of these California-based HMOs are in good position to benefit from the Clinton administration's reforms and a comeback in stock prices.

"I think that the stock market reacts to uncertainty, and I think what the health care system in this country will look like in five years is uncertain," said Arthur Southam, chief executive officer of Chatsworth-based CareAmerica Health Plans, a wholly-owned subsidiary of UniHealth America, a nonprofit hospital system based in Burbank. "But I think that with HMO stocks, we're seeing a significant recovery."

One local HMO that expects a boost from Wall Street's renewed confidence is FHP International Corp. It saw its stock drop to this year's low of $17.50 per share in mid-January and recover to $24 per share as of market close on May 17.

Ranked the 11th-largest managed care company in the country, according to July 1992 data from Alex. Brown & Sons, FHP reported earnings per share rose to 43 cents for the quarter ended March 31, up from 32 cents a year earlier. For the quarter ended March 31, enrollment increased 18 percent to 820,000 members and revenues increased 28 percent to $536 million from the like quarter the previous year.

Boston-based investment firm Alex. Brown & Sons predicts FHP should see a 20 percent increase in earnings per share during the next three to five years.

While an Alex. Brown report on FHP noted that "health care stocks have been under pressure since February, based on speculation on health care reform," the company's report further stated that the market has become "more rational recently as the (Clinton) administration delays unveiling its program ... it is important to note that we may still see surprises and shocks related to health care reform that could cause price volatility."

Another HMO expected to see stock benefits is PacifiCare, which saw its stock price drop to $25.50 in January and recover enough to close at $41.62 a share on May 17.

"I think their prospects are excellent," said Lucy Olwell, an analyst with Merrill Lynch & Co. in New York who follows PacifiCare. "All the HMOs will do well this year. They are the only viable solution to rising health care costs."

Merrill Lynch recommends PacifiCare stock.

The HMO reported earning 54 cents per share for its fiscal second quarter ended March 31, up from 42 cents a year earlier. The company reported operating revenues increased 31 percent to $555 million. Total membership for the same period grew 14 percent.

PacifiCare CEO Alan Hoops said, "In the last month, there has been less uncertainty and more positive news about Clinton's plan, and I think that's being reflected in the HMO stock prices."

He noted that more people are admitting that "managed health care has got to occupy a strong position in any health care reform."

Hoops said the Southern California HMO market could see some consolidation and acknowledged that "acquisition is part of our strategy."

Ellie Kerns, a health care analyst with Alex. Brown & Sons, said she expects California HMOs to expand and diversify both geographically and in their product lines. She said she also expects some consolidation in the industry.

Local analyst Mark Matheson, a senior analyst with securities firm Crowell, Weedon & Co. in Los Angeles, believes long-term investors would be wise to look to HMOs.

"Stock prices will be somewhat volatile for the next year, as people try to assess what Clinton's health plan will be. Then there will be steady growth in the future," said Matheson.

He predicted "some consolidation" in the local HMO industry, saying "small HMOs like MaxiCare will be bought out."

L.A.-based MaxiCare is the tenth-largest HMO serving L.A. County. The company's stock hit a low of $7.50 this year and closed at $11 per share on May 17.