AET - Aetna

Aetna, a health care industry company, operates in 3 segments.

1. Health Care segment consists of health and dental plan.
2. Group insurance segment offers life, disability, and long term care insurance products.
3. Large case pension segment manages a variety of retirement products.

Closed at $39.61 on 5/12, AET has a market cap of 22.5B. With P/E = 14, P/B= 2.15, It is competitively valued among healthcare plan sector (comparison made among AET, UNH, WLP). Since 2003, the company had a proven growth record (an average 13% revenue growth and 30% income growth).

AET also has an aggressive share repurchase program, purchased back over $1.6B shares in 2005, and had over 1B authorized repurchase plan for 2006. It is worth noting that the company purchased back over $150M in 1Q2006 at an average price around $53. With over an equivalent of $15B cash in reserve, we shall expect Aetna buy back stocks more, which will further make its various ratios stand out (i.e. P/E). (note: don't get too excited about its cash postion, this company also has a significant long-term liability, I couldn't figure out what it is for, if you happen to know, please share with me)

The company delivered a better-than-expected 1Q2006 result, while the stock price plunges over 20% from $46 to $37. What went wrong? According to some after-sought analysis, the plunge is contributed to the fears that its underwriting margin has the potential collapse risk based on the discussion during the conference call.

What is underwriting margin? – an oversimplified explanation is that medical cost rises faster than pricing. O.K. I have no expertise to figure out whether the fear is well founded or not, however, the subject itself is very complicated that I suspect how this issue could be possibly clarified and well understood in a 1-hour conference call. In my opinion, it is a classical example of speculative overreaction.

As if the above reasoning is not strong enough, 2 AET officers purchased over $1M AET shares from May2 - May9 price ranged from $37 to $40.

Why I mention this stock today? Last week is a tough week, everything going down. I have no idea which direction the market is heading to, however, I think it is not a bad idea to play some defensive hand – and AET is certainly one of the good choices.

My 6-month price target is $46, over 15% premium to current price. AET will be added into my leopard strategy portfolio.