Readers of this space know that the bias favors conservative-to-moderate risk companies with demonstrated business models. Moreover, the methodology emphasizes fundamentals, preferably supported by technical indicators. But every once in a while, the technicals take precedence, particularly in an oversold stock in an out-of-favor sector where the 50-day moving average comes in to play. Cigna (NYSE: CI) is one such case study.
In 2008, Wall Street abandoned Cigna, as it did most insurers, due to actual loses and the possibility of future losses associated the mortgage-backed portfolios. Cigna's haircut was truly unpleasant: a descent from a high above $55 to a low around $8. Ouch. The First Call F2009 / F2010 EPS estimates for CI are $3.74 / $4.16.
However, for the past three months or so, CI has mounted a winning battle with the 50-day moving average, which suggests institutional investors are incrementally adding to their CI positions. Do the institutions know something typical investors don't? Probably, hence a Buy rating has been generated, but do note the tight Sell / Stop Loss: this is a high-risk play, and one also where no nonsense will be tolerated.
Stock Analysis: Cigna is high-risk stock. Consider buying a 25% position in CI now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your CI position in the first half of 2009. Sell / Stop Loss if you were to buy shares in this company: $16.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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