Cigna, CVS, Humana, and More: 10 Healthcare Stocks Hedge Funds Love

After identifying the ten most popular stocks among hedge funds according to their third quarter 13F filings, we have decided to break down the top ten stocks that hedge funds love in the healthcare sector. The list includes the hundreds of hedge funds and prominent investors that are required by the SEC to disclose their public equity holdings quarterly. In descending order, we have outlined the most-loved healthcare stocks based on the aggregate number of funds owning the stock. Many of these healthcare stocks have solid opportunities to outperform the broader market on the back of a rapidly aging population and healthcare reform, which will increase the number of Americans with healthcare coverage over the long run.

GREENLIGHT CAPITAL

Cigna Corp (NYSE:CI) is the 10th most popular healthcare stock among the funds we track; 38 funds owned the stock at the end of Q3, an identical level from the previous period. Cigna sounds cheap at 10x earnings, but looking closer, it is actually trading higher than its major insurance servicing peers on a P/E and P/S basis. This insurance provider should manage to post solid growth in the long term, but we would wait for a pullback in the stock. Based on 3Q 13F filings, Cigna continued to be one of billionaire David Einhorn's favorite picks.

McKesson Corporation (NYSE:MCK), although at 9th with 38 funds, did see a net increase of three owners in Q3 from Q2. This medical supply company trades in line with major competitor AmerisourceBergen, but we believe the market is not accounting for the product diversity and increased customer base that will come from its recent PSS World Medical acquisition. This is in part evidenced by its below-industry forward P/E of 11.6x, which is also below its trailing P/E of 14.3x. McKesson is a top stock pick for Glenview Capital.

With 41 funds interested in the stock at the end of Q3, CVS Caremark (NYSE:CVS) comes in at 8th. CVS has outpaced Walgreen by almost 13 percentage points in terms of year to date stock performance. This has been driven by the market share and customer base that CVS picked up when Walgreen stopped accepting Express Script customers. We expect CVS's outpacing to continue into the foreseeable future, as management expects to keep at least 30% of Walgreen customers, despite the fact that Express and Walgreen have since renegotiated their contract. CVS is also a First Advisors' top stock pick.

Humana Inc. (NYSE:HUM) came in 7th with 43 filers at the end of 3Q. Humana has been drug down over 20% year to date, namely on the back of the health care reform news and the concerns of how it will impact the insurer. Although the health care company has a vast presence, including marketing ability and name recognition, we would wait to see the exact fallout for Humana. The pullback in the stock has not exactly presented a value opportunity, as Humana is now trading in line with peers on a P/E basis, and analysts only expect five-year earnings growth of 5% annually. Humana is also a favorite of Mathew Martoma's former hedge fund.

Walgreen Company (NYSE:WAG) saw a net decline of 5 filers from 2Q, now having only 43 as of the end of the third quarter. Despite the fallout of Walgreen and Express Scripts earlier this year, both stocks made this list. CVS has captured some of Walgreen's market share, and the stock felt the impact on earnings last quarter, missing estimates by 5%. The one bright spot for Walgreen investors, compared to CVS, is Walgreen pays out a dividend that yields 3.5%, compared to CVS's 1.4% yield.

Gilead Sciences, Inc. (NASDAQ:GILD) saw the largest percentage increase in filers during 3Q, now having a total of 45, an almost 9% increase from 2Q. This biopharma company is up 85% year to date and still manages to trade in line with its peers. Throw this in with its 23% expected annual five-year EPS growth rate, and the pharma company looks to be a value play at a PEG of 1.0.

Aetna Inc. (NYSE:AET) saw no net change in the number of filers owning its stock in 2Q, having 49 in 3Q. The health insurance product company actually trades at one of the lower P/E ratios (8x) in its industry. This, coupled with the growth prospects and synergies that the Coventry acquisition will bring gives us a reason to consider the stock as a possible buy.

WellPoint, Inc. (NYSE:WLP) saw 49 filers as owners and UnitedHealth Group Inc. (NYSE:UNH) had 50 filers. Both saw a decline of 8 filers owning their stock from 2Q, when WellPoint had 57 and UnitedHealth had 58. WellPoint is a health benefit company trading at only 7x trailing earnings. Already being the largest managed healthcare company in the U.S., its pending Amerigroup Corp. acquisition will only broaden WellPoint's footprint and coverage, to the extent we think the company might be a very good buy.

UnitedHealth is one of the giants, as measured by market-cap of the ten stocks listed, and is also one of the most diversified companies we've discussed. Even so, at an appropriate valuation around 10x earnings, relatively low earnings growth (five-year ~10% CAGR) compared to the investment opportunity set, and a relatively low 1.6% dividend yield, there are reasons to be bearish.

Express Scripts Holding Company (NASDAQ:ESRX) was the most popular stock among hedge funds, with 69 funds having a position in the stock at the end of 3Q. Express was up as much as 40% on the year before missing 3Q earnings and seeing a sharp decline in its stock price. Even with the recent selloff, the prescription benefits company still trades on the high end of the industry at 30x, and well above its historical P/E average of around 22x earnings, but forward-looking earnings multiples are below 13x - rather cheap in our opinion. Other positives for Express Scripts include: a strong cash position, bullish mail order business, and exemplary penetration in generic product markets.

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