2 Healthcare Stocks For The Long-Term Investor

Includes: AET, CI
by: Leonid Kanopka

Long term investing has always proved beneficial for me over the short run, but everyone has their own investment strategy. This article highlights two stocks that I have found to be excellent choices for long-term investors and retirement accounts, Aetna (NYSE:AET) and Cigna (NYSE:CI). These stocks are poised for a fast turnaround once the market catches up with its fundamentals.

When it comes to long-term investments I like to use three techniques which have helped me choose these two winners. First is to identify your investment strategy, second is to invest in undervalued assets, and lastly, it is important to ignore short-term market fluctuations. I feel these two stocks have a lot of potential for growth, and most definitely should not be ignored by long-term investors.

Aetna is in the growing healthcare industry and performs as a diversified health care benefits company in the United States. It offers a range of health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life, and disability plans, as well as medical management capabilities and Medicaid health care management. AET is currently trading at $39.77 with a one-year analyst price target of $51.22. This represents a 28.79% upside potential. Currently, EPS is 4.7 with a P/E ratio of 8.47x, not to mention a current dividend yield bonus of 1.7%. The company has an operating profit margin of 5.42%, ROA of 5.14%, and ROE of 17.82%. Despite the low share price, AET has a 52-week price change of 30.38% and no signs of a slowdown. AET is fundamentally very strong and has beat analyst earnings estimates for the last four quarters with no sign of a slowdown. Another reason this stock is a buy is the fact that Zack's has AET at a #1 ranking for additions to your portfolio, and a "strong buy" consensus from analysts. There has been rapid growth in healthcare prices and government partnerships in Europe and the Middle East, which represents additional areas of growth. This company also has an EPS advantage over its competition of almost $3; AET is poised for long-term growth. Another reason I am very bullish about this stock is because Aetna has low exposure to MLR (Medical Loss Ratio) reform and exposure to ASO (Administrative Services Only) provides margin stability. Aetna has a diverse membership book, which provides the company margin stability in times of change, such as healthcare reform. Overall, I am very bullish on this stock, and think it is a great addition to a long-term portfolio.

CIGNA is a global health service organization with subsidiaries that are providers of medical, dental, disability, life and accident insurance and related products and services. The current market price is $42.61 with a one-year analyst price target of $56.21. This represents a 31.92% upside potential with signs of even more growth for the longer run. Currently, EPS is 5.5 with a P/E ratio of 7.5x, and a shy dividend of 0.1% (better than nothing). The company has an operating profit margin of 6.83%, ROA of 3.02%, and ROE of 21.06%. CI has a debt to cash flow ratio of 1.59, which is good. A rule of thumb to consider when looking at investments is if the company can pay off its debt within three years, and we get this number by dividing total long-term debt by current free cash flow; given a number like 1.59 means CI is in good shape. Another reason I like CI is because of its 52-week price change of 16.16%, which has beat the S&P return of -0.77%. Not only has CI beat analyst earnings estimates for 12 quarters in a row, but it has beat the S&P in 1yr, 5yr, and 10yr, with no significant sign of slowing down. With strong fundamental data (in comparison to its peers), historic performance, and the position of the company, there is no reason this stock should not continue to outperform the market year after year. I like the fact that CIGNA's profitability is well spread across four segments, providing outlets for growth in 2012 and beyond when reform implementation hits commercial plans. CIGNA's membership mix also protects it from the reform measures. Although CIGNA faces risks from the implementation of the U.S. Health Care Reform Act, it generates approximately 40% of its revenues from activities unrelated to the U.S. health care market. In addition, within the health care business, more than 80% of revenue comes from fee-based or service-based activities, rather than risk-based plans. As such, the company has a relatively smaller risk exposure to the recently enacted Federal Health Care Act, not to mention its move into China and Korea and is expected to enter other regions as well. With the growth of the health industry, and the implementation of healthcare reform, this stock at its current price has not seen its potential. Therefore, I believe this is a staple to any long-term portfolio, and a steal at its current price.

Disclosure: I am long AET, CI.