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Einhorn Scores a Quick, Fat Win in Coventry Health (CVH); Traders Look For His Next One

August 20, 2012 11:27 AM EDT Send to a Friend
Hedge fund titan David Einhorn scored quick and big in Coventry Health Care Inc. (NYSE: CVH) for investors of his Greenlight Capital hedge fund.

Last week, Einhorn disclosed a new 6,660,000 share position in Coventry at the quarter second quarter ended June 30, 2012.

With share of CVH trading at $41.34 this morning after a cash and stock deal to be acquired by Aetna (NYSE: AET), Einhorn is up 30 percent from the June 29th close.

In his June 30th letter to investors, Einhorn discussed Coventry as follows:
"CVH is a regional managed care company with operations in the mid-Atlantic, Midwest and parts of the South. The company offers commercial risk-based insurance and has an expanding business in the government-sponsored Medicaid and Medicare programs. Problems with a recently-acquired three-year contract to provide managed care services to the Medicaid population in Kentucky caused the company to significantly reduce earnings guidance for 2012. This led to a large drop in the stock price. We believe the issues related to the Kentucky contract are manageable and finite, and CVH will return to breakeven or a profit on this contract in 2013 from a loss this year. Our average purchase price of $31.22 represents 8x our forecast for 2014 earnings net of $6 per share of cash and reflects our estimate of the negative impact of Obamacare."

Einhorn is not only playing in Coventry Health, he established new positions in a host of managed care companies: Aetna, Inc. (NYSE: AET), Cigna Corp (NYSE: CI), Humana, Inc. (NYSE: HUM), UnitedHealth Group, Inc. (NYSE: UNH) and WellPoint, Inc. (NYSE: WLP).

Commenting on the sector in the second quarter letter, Einhorn notes the entire sector has been battered in anticipation of Obamacare. He said "for the most part, these companies have unlevered balance sheets and trade at single-digit P/E multiples on earnings and should continue to growth." He also notes they have no exposure to the European currency crisis, a possible Chinese slowdown or other cyclical headwinds. "While the stocks are already cheap, there is the additional unpriced upside in the possibility that the election changes the political landscape, resulting in the possible modification or repeal of Obamacare."

Einhorn also offered some specific thoughts on Cigna - "We believe that CI deserves a higher multiple because the plan administration business is a service business that doesn’t take risk, and the other divisions do not warrant discounted values." His purchase price for Cigna is $45.42. Currently shares of CI trade at $44.22, meaning you can get in below Einhorn.




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