close icon

Cigna: Fundamental Analysis Simply Not Enough

Cigna Corporation has been one of the wonder stocks of the last 8 years. Shares of the health services organization gained from as low as 8 dollars a share in November, 2008, to as high as 170.68 in June, 2015. We are not even going to calculate those gains in percentage points. “A lot” is a good enough answer. But the post-crash years are not the only interesting thing in Cigna’s story. The pre-crash period is where the really valuable lessons could be learned from. So let’s start with Cigna’s monthly log price chart, showing the stock’s uptrend between 1984 and 2007.
In split-adjusted prices, Cigna rose from $3 per share in 1984 to $57.61 in 2007. After such a long record of stock gains, supported by a strong business behind it, it would have been quite normal to expect even higher prices in the future. Furthermore, probably the most important ratio to fundamental analysts – the price to earnings ratio or P/E – was suggesting that Cigna stock was still undervalued in 2007. Let’s calculate it for the year 2007 the way Benjamin Graham, the father of value investing, said we should – by dividing the price to the average earnings per share for the last three years. Cigna earned $4.17, $3.43 and $3.87 in 2005, 2006 and 2007 respectively. This means 3.82 on average. Taken to the closing price for the year 2007 of $53.73, this makes a P/E ratio of 14.05. According to Graham’s rules, a company is undervalued if this ratio is below 15, which makes Cigna the perfect value investment, at least based on this ratio.
That is what the average fundamental analyst would have thought of Cigna stock. Now, let’s examine the above-shown chart from the standpoint of technical analysis. The first thing the conventional technician would see in 2007, is the RSI bearish divergence between the tops in December,2000, and the high in 2007. This would have triggered the first warning alarm that Cigna stock was not as healthy as it seemed.
On top of that, the Elliott Wave analyst would immediately spot that Cigna’s entire uptrend took the shape of a perfect five-wave impulse. The Wave Principle states that every impulse is followed by a three-wave correction in the opposite direction. So, his idea of Cigna’s future prospects in 2007 would have looked similar to the chart above. The chart below shows if he was right in his expectation.
Despite that the P/E ratio screamed “BUY” in 2007, every Elliottician would be expecting a significant decline to the termination area of wave IV or even lower. The chart above clearly shows, which one of the two analyses gave better results. Between June 2007 and November 2008, Cigna lost over 86% of its market cap. Now, let’s hear what the two analytical methods would have said for Cigna stock in 2008. At the end of the year, shares traded at $16.85, thus giving an average P/E ratio of 6.05 for 2006, 2007 and 2008, making the stock even more compelling value investment.
Additionally, Elliott Wave analysts know that once a correction is over the larger trend resumes. Furthermore, the relative strength index was showing that the stock was deeply into oversold territory and the plunge is probably over. According to the charts, the end of 2008 and the start of 2009 was the best period to turn bullish on most stocks, including Cigna. Unfortunately, most people failed to recognize this rare occasion, when fundamental and technical analyses actually confirmed each other. Just like people did not expect the crash in wave (II), the recovery in wave (III), shown below, came out of the blue to them, as well.
Prices have been steadily rising with almost no interruptions for the past 8 years, thus once again proving the Wave Principle’s ability to help traders and investors make better decisions. In our opinion, fundamental parameters are most misleading right before the bear market begins. But there is much more to fundamental analysis than the P/E ratio, many would say. Yes, we know that. It pays attention to balance sheets, income statements, cash flows, management and many other important things, when analyzing a particular company. That is why our conclusion is as follows: Elliott Wave tells you, when a stock is likely to enter the negative phase of the market cycle. Fundamental analysis tells you if the company behind this stock can survive this negative phase. Needless to say, both are equally important and could be useful under the right circumstances. So, instead of opposing one to the other, why not just… combine them?

Stay informed with our newsletter

Latest Elliott Wave analysis on different topics delivered to you weekly.

Privacy policy
You may also like:

WorldCom – from Telecom Giant to $11 Billion Accounting Fraud

WorldCom was destined to be part of the new generation of telecoms that dominate the U.S. Companies like Verizon, T-Mobile and Qualcomm, giants that to this day appear on the watch lists of stock traders. So what happened to a company that had a market cap of over $175 billion at its peak? How could…

Read More »

The Dotcom Bubble and Bust of 1995-2002

In early August 2018 we came across an article saying that “..stocks are as pricey as they were during the dotcom bubble”. This made us reminisce about one of the largest drops in the U.S. stock market’s history, especially for the NASDAQ. But what exactly caused the Dotcom Bubble and where are the companies involved…

Read More »

Enron – One of the Biggest Stock Market Scams of All Time

In 2001 Enron Corp. was one of the high-flying U.S. corporations. An innovator, a leader with an impeccable team at the helm and with billions coursing through its veins. The company was the pioneer in introducing several crucial changes in the energy sector which was liberalized in the early 90s. Enron was the first and…

Read More »

Bitcoin is Not a Bubble, Because… Oh, Really?

Bitcoin is everywhere you look these days. From bank officials, to hedge fund managers, to IT specialists, people with different professions, level of education, interests and investing experience are talking about Bitcoin. And who can blame them – the virtual currency is conquering milestone after milestone, climbing from $8000 to over $11 000 in just…

Read More »

What Do Oil and Tulips Have in Common?

If we need to provide a definition for a “market bubble”, we would describe it as a part of the economic cycle, which characterizes with a rapid and often irrational expansion of the market, accompanied by a an unprecedented surge in prices, driven mainly by optimism and euphoria about the future, followed by an unexpected sharp contraction…

Read More »

ECB’s Quantitative Easing (QE) and Velocity

Why ECB quantitative easing program may not achieve the much needed results? If we follow the economic theory, an increase in the money supply should cause inflation and therefore price inflation. But here comes the tricky part. Most economists do not make the difference between these two concepts. Inflation is an increase in the overall money…

Read More »

The Wave Principle and “The Panic of 1907”

Have you ever heard of “The Panic of 1907”? Before the Great Depression of 1929-1933, 1907 was known as one of the worst years in the history of the stock market. Needless to say nobody saw it coming when the Dow Jones Industrial Average climbed above the 100 dollar mark for the first time in January 1906.…

Read More »

More analyses