An Insider Bought Shares of Aetna

An executive vice president at Aetna Inc. (NYSE:AET), Karen Rohan, directly purchased just over 4,000 shares of the company’s stock on February 6th at an average price of $49.53 per share according to a Form 4 filed with the SEC. Studies show that insider purchases tend to be bullish signals (read more about studies on insider trading). We think that this is because insiders face a strong incentive to diversify their wealth away from the company, and therefore reduce their risk; when they ignore the benefits of diversification and buy the stock anyway it signals high confidence in the company. This is why, in addition to using hedge fund filings to develop investing strategies (for example, our most popular small cap stocks among hedge funds which produced an excess return of 18% between September and January), we also maintain a database of insider purchases and take a brief look at significant insider buys to help investors decide if the company is worth further research.

Aetna Inc. has already reported its results for the fourth quarter of 2012. If we eliminate the effects of a group annuity contract conversion (which increased both revenue and expenses by about $940 million), then revenue was up 5% from the same period in 2011. However, higher health care costs rose faster than premium revenue, which not only reduced margins but also caused earnings to fall by 49%. The stock now trades at 11 times trailing earnings- health insurers in general are valued at fairly low multiples of earnings, as the market considers the industry in danger of further federal regulation. Analyst expectations for 2014 imply a forward price-to-earnings multiple of 9, showing that the sell-side expects the recent decline in net income to reverse. Even if Aetna can hold its business steady and see no growth, the stock is cheap enough that it might be worth considering.

GREENLIGHT CAPITAL David Einhorn

Billionaire David Einhorn’s Greenlight Capital, which has been a major owner of many health insurance companies, increased its stake in Aetna Inc. during the third quarter of 2012 to a total of 4.4 million shares (see Einhorn’s stock picks). Orbis Investment Management, which is managed by William Gray, had 6 million shares in its own portfolio at the end of September (find Orbis’s favorite stocks). Barry Rosenstein’s JANA Partners initiated a position of 2.3 million shares in Aetna during the quarter (check out more stocks JANA was buying).

Let’s look at Aetna compared to its peers:

Other health insurance companies include Humana Inc. (NYSE:HUM), Cigna Corporation (NYSE:CI), UnitedHealth Group Inc. (NYSE:UNH), and WellPoint, Inc. (NYSE:WLP). WellPoint carries a trailing P/E of 8, while the other three peers all match Aetna at 11 times their trailing earnings. WellPoint had reported an abnormally high growth rate of earnings last quarter compared to the fourth quarter of 2011, with revenue up only slightly. However, Wall Street analysts are quite bullish in the company as they expect that low earnings multiple to hold on a forward basis and the five-year PEG ratio comes out to 0.7. Humana, Cigna, and UnitedHealth, meanwhile, have PEG ratios of about 1 as their recent earnings performance has been about flat (with the exception of Cigna, who recently carried out a large acquisition which has driven both revenue and earnings higher) and analysts seem only moderately optimistic about these companies.

With the industry trading in such a narrow range of earnings multiples, we actually think we might avoid Aetna in favor of its peers seeing as its business has been performing poorly recently. Of course, investors who think that the health insurance industry has too much regulatory risk would likely avoid these companies altogether (since they are all too cheap to be attractive shorts merely on the risk of further regulation). Aetna’s peers trade very much in value ranges and their earnings seem like they might be stable going forward.

Disclosure: I own no shares of any stocks mentioned in this article.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!