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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.
cigna-25-10-16-1
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.
cigna-25-10-16-2
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.
cigna-25-10-16-3
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?



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