Do Hedge Funds Love Aetna Inc. (AET)?

The third-quarter stock market correction has turned out to resemble the situation observed during the Asian financial crisis of 1997. The two relatively short-lived corrections occurred at a time with stable interest rates, falling commodity markets, with strong-performing technology and healthcare sectors, and struggling energy sector. Similarly, the two corrections followed long periods without a correction, which had to come sooner or later and it did. Even so, several prominent hedge fund investors publicly asserted their bearish view on the current state of the U.S. equity markets, suggesting that they significantly cut their exposure to equities during the latest quarter. Having said that, it would be worthwhile to take a look at the hedge fund sentiment on Aetna Inc. (NYSE:AET) in order to identify whether reputable and successful top money managers continue to believe in its potential.

Is Aetna Inc. (NYSE:AET) a great stock to buy now? The best stock pickers are reducing their bets on the stock. The number of long hedge fund positions fell by four lately. At the end of this article we will also compare AET to other stocks including CIGNA Corporation (NYSE:CI), China Telecom Corporation Limited (ADR) (NYSE:CHA), and Raytheon Company (NYSE:RTN) to get a better sense of its popularity.

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Among Aetna’s shareholders is Larry Robbins’ Glenview Capital, which discussed the company (and its other bets in the industry) in its third-quarter letter to investors. On the next page we are going to take a closer look at Glenview’s take on Aetna.

“In managed care, we were pleased, if not elated, to see two transactions announced amongst our four portfolio holdings that are each significantly value-creating for both buyer and seller and came at meaningful premiums. In acquiring Humana, Aetna is purchasing a stronger growth business with greater organic growth (>10% top-line) in a transaction we believe will be mid-teens accretive to earnings per share in the near-term and greater than 20% accretive in the out years following synergies from each PBM operation. In acquiring Cigna, Anthem will achieve greater than 20% accretion in the near-term and as much as 30% accretion when the full PBM savings are captured late this decade. We have done extensive anti-trust analysis on each situation, and believe the odds of a completed deal between Aetna and Humana are exceedingly high, while a combination between Anthem and Cigna is highly likely to close as well. Despite our views, each arb spread is trading at 27% and 33% respectively, and each acquirer has seen their shares decline on average 16% despite the 15-30% accretion from the deal.

In retrospect, we attribute this share price weakness to the following factors:

1. Risk aversion from traditional arb and event funds who have had very challenging conditions over the past 18 months, several of whom have liquidated;

2. Time arbitrage, with the deals unable to close in calendar 2015, causing investors to feel they may sell today and come back another day;

3. Concerns regarding the statements of political candidates during the election cycle that express populist concerns regarding the potential for market power coming from such consolidation; and

4. Fear that they are heavily owned by hedge funds, including Glenview, who have had poor performance, and as such that those funds will be forced sellers and create better buying opportunities later.

Looking forward in managed care, we own four names, Aetna, Anthem, Cigna and Humana. As mentioned Aetna has announced the acquisition of Humana and Anthem has done the same for Cigna. We have strong conviction in these names even without the mergers going through and view the mergers as adding a compelling asymmetric upside to the names. Take for example the Anthem and Cigna deal (illustratively, Aetna and Humana are in a similar situation). Anthem is trading at 11x 2017 standalone EPS (and <10x including the stand-alone earnings opportunity from its PBM). Cigna is trading at ~12x 2017 standalone EPS. Each company has projected a standalone EPS CAGR of 13-14% from 2015-2018. Should this transaction fail to receive anti-trust approval, we see 20-35% annualized returns in the names through the end of 2016. However, we do believe this transaction is highly likely to receive approval (we will discuss our anti-trust views of each transaction in further detail at our Investor Day on November 12th). Pro forma for the transaction, Anthem is trading at under 10x 2017 EPS, and should grow high-teens from 2017-2019 as the full accretion for the deal comes in. In this event we think Anthem’s stock could return almost 50% annualized return by year end 2016. Further, we think Cigna could achieve 50-70% annualized returns between now and deal closing.”

With all of this in mind, let’s view the key action regarding Aetna Inc. (NYSE:AET).

Hedge fund activity in Aetna Inc. (NYSE:AET)

At Q4’s end, a total of 66 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -6% from one quarter earlier. With hedgies’ capital changing hands, there exists an “upper tier” of noteworthy hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

Of the funds tracked by Insider Monkey, Glenview Capitalholds the biggest position in Aetna Inc. (NYSE:AET). Glenview Capital has a $620.3 million position in the stock, comprising 3.5% of its 13F portfolio. The second most bullish fund manager is AQR Capital Management, led by Cliff Asness, holding a $425.2 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Other professional money managers with similar optimism comprise Doug Silverman and Alexander Klabin’s Senator Investment Group, Ken Griffin’s Citadel Investment Group and Andreas Halvorsen’s Viking Global.

Due to the fact that Aetna Inc. (NYSE:AET) has witnessed declining sentiment from the smart money, logic holds that there lies a certain “tier” of funds that slashed their positions entirely by the end of the third quarter. Intriguingly, Keith Meister’s Corvex Capital sold off the largest investment of all the hedgies followed by Insider Monkey, worth an estimated $348.9 million in call options.. Daniel S. Och’s fund, OZ Management, also cut its call options., about $156.5 million worth. These transactions are interesting, as total hedge fund interest dropped by 4 funds by the end of the third quarter.

Let’s now take a look at hedge fund activity in other stocks similar to Aetna Inc. (NYSE:AET). We will take a look at CIGNA Corporation (NYSE:CI), China Telecom Corporation Limited (ADR) (NYSE:CHA), Raytheon Company (NYSE:RTN), and Suncor Energy Inc. (USA) (NYSE:SU). This group of stocks’ market valuations resemble AET’s market valuation.

As you can see these stocks had an average of 34 hedge funds with bullish positions and the average amount invested in these stocks was $1.61 billion. That figure was $3.25 billion in AET’s case. CIGNA Corporation (NYSE:CI) is the most popular stock in this table. On the other hand China Telecom Corporation Limited (ADR) (NYSE:CHA) is the least popular one with only 5 bullish hedge fund positions. Aetna Inc. (NYSE:AET) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. In this regard CI might be a better candidate to consider a long position.