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Should you buy NIB Holdings Limited or Medibank Private Ltd?

Shares of NIB Holdings Limited (ASX: NHF) were sold down heavily on Monday but have recovered most of their losses early in today’s session to be trading at $3.15. The fluctuating share price can likely be attributed to the pending float of Medibank Private Ltd (ASX: MPL) which will occur on Tuesday at noon.

Medibank Private is Australia’s largest health insurer and is being sold for a massive $5.7 billion by the Federal Government. Given the enormous level of interest that the float has received, the stock is likely to begin trading anywhere between $2.15 and $2.40 today, which will deliver retail investors with an immediate paper profit between 7.5% and 20%.

However, even if it were to open at the lower end of that spectrum at $2.15, it will be trading on a lofty P/E ratio of roughly 23 times forecast earnings. While that price could be justifiable if management proves able to drastically reduce costs and improve margins over the coming 12 months, it certainly seems like a tough task.

On the other hand, NIB Holdings, Australia’s only other listed health insurer, is trading on a projected P/E ratio of roughly 18.5 times forecast earnings, yet it could offer significantly greater growth prospects given its smaller size. Should the share price of Medibank Private skyrocket today or in the days to follow, investors could certainly decide to lock in their profits and switch into NIB Holdings instead.

Whatever happens, it is very possible that both companies’ share prices will remain volatile in the coming days.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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