By Matt Doiron
… so he picked them all. During the second quarter, Greenlight Capital initiated positions in Cigna (NYSE:CI), Coventry Health Care (CVH), UnitedHealth Group (NYSE:UNH), Humana (NYSE:HUM), WellPoint (NYSE:WLP), and Aetna (NYSE:AET) (see more stocks in Greenlight Capital's portfolio). If you leave out Express Scripts, which focuses on pharmacy benefit management and thus operates in its own niche, these are the six largest market cap companies in the health care plan industry. There was some difference in position sizing: Cigna was the largest, followed by Coventry and then the other four companies in a cluster. However, all six positions were worth between $120 and $300 million, suggesting that for the most part Einhorn and his team are investing in the industry and don't see much daylight between the various companies. What if an investor wants to take Einhorn's investment as a signal to get into the health insurance industry, but wants to focus on only one or two out of the six he chose?
P/E ratios. The most basic way of evaluating valuations of stocks relative to each other are trailing and forward P/E multiples. From this perspective, UnitedHealth and Coventry appear to be higher priced relative to their peers. They carry the highest earnings multiples on both a trailing (11 and 13 compared to 8 through 10) and forward (10 and 13 compared to 7 through 9) basis. Aetna and WellPoint are the cheapest, tied at the bottom of the range in both cases.
EV/EBITDA ratios. The market capitalizations of UnitedHealth, Coventry, and Cigna place them at an implied trailing EV/EBITDA multiple of 6. Aetna's is 4, while the other two companies have even lower multiples due to the large amount of cash on their balance sheets. Between this statistic and the P/E ratio we would be inclined to say that Aetna, WellPoint and Humana are the cheapest when comparing their market prices to the performance of the companies' businesses.
Recent earnings growth. UnitedHealth was the only one of the six companies to report growth in earnings in its most recent quarter compared to the same period in the previous year, at 6%. Cigna saw a small decline- 3%- and WellPoint's 8% was modest as well. The other three insurers all saw double-digit percentage decreases in earnings compared to the same quarter in 2011.
Other hedge funds. Renaissance Technologies slightly reduced its position in Humana over the course of the second quarter but still finished June with 2.2 million shares. Leon Cooperman's Omega Advisors reported positions in WellPoint and UnitedHealth- 2 million shares of each- though again these were small declines compared to the first quarter. Dan Loeb apparently had the same idea, and came to the same conclusion, as Einhorn: he initiated new positions in all of these companies except for Coventry in the second quarter.
Dividends. Cigna has a very small dividend yield with the other five companies all paying between 1.5% and 2%.
Other factors. Cigna and Aetna also provide life insurance policies as well as managed care products, while UnitedHealth's Optum business serves as a software and business process consulting company. Aetna has announced plans to acquire Coventry at a price of about $42.08 per share; the latter company's stock price stands at $41.72, which implies an 0.9% increase if Aetna can close the deal (expected in mid 2013) and possibly a decline if the deal crumbles. WellPoint is also attempting to acquire a company, the smaller Amerigroup.
Our analysis is that WellPoint is the most "well rounded" investment: it trades at a low valuation, saw a moderate decrease in earnings last quarter, and is a favorite of Omega's. Aetna and Humana are also good value picks, with Humana being the obvious choice of an investor wants to weed out the two acquirers. We don't think that Coventry is a good value unless Aetna is forced to raise its offer. UnitedHealth and Cigna are higher priced, and so would have to continue their outperformance in order to justify their higher multiples.