We recently published a list of 10 Wonderful Stocks to Buy Now at a Fair Price. In this article, we are going to take a look at where The Cigna Group (NYSE:CI) stands against other wonderful stocks to buy now at a fair price.
In H2 of the year so far, there are signs that the S&P 500 index has been broadening beyond technology leadership and the index is reverting to a more normalized state. This means that there are several high-quality stocks outside of the popular names and investors are required to be diversified. This diversification should not be limited to the style level, but also to the stock level. Market experts opine that the AI theme has largely fuelled the narrow market. This concentration, along with an increase in passive investments, resulted in a significant cycle of consensus positioning and stretched valuations. This led to the vulnerability in the market, which resulted in a sharp correction in July and early August.
As per Fidelity International, when it comes to passive investing in the S&P 500, it demonstrates nearly a third of holdings in only 7 stocks. Considering their dominance, a stumble in performance means the index will see a significant impact, and the investors have already seen some mega-cap technology names that are unable to deliver on strong expectations.
S&P 500 Index – Transition and Concentration
The US equities saw an outstanding performance in H1 2024, with the S&P 500 Index rising 15.3%, as per ClearBridge Investments (A Franklin Templeton Company). The investment firm believes that solid earnings results and fiscal stimulus mitigated the influence of higher interest rates. However, the headline performance numbers, aided by a ramp-up in mega-cap stocks and, more specifically, semiconductor leadership, eclipsed the recent signs of deterioration below the surface.
Since the Mag 7 stocks have disproportionately driven earnings growth over the previous 2 years, ClearBridge Investments expects a rebound in earnings among small-cap stocks in the upcoming 12– 18 months. The investment firm believes that small-cap companies have seen the impacts of higher rates. In 2023, profits for Russell 2000 companies declined ~12%. This year, they are up ~13.6%, and for 2025, the projections hover at around ~31%. If this happens, there might be a broadening of the market which should provide an opportunity for active managers.
Opportunities Apart from Magnificent Seven
Companies that are unable to meet hefty expectations might see a disproportionate sell-off, and the stocks riding the wave of AI might be significantly exposed considering the amount of capital deployed versus the uncertain future environment. Given such trends, Fidelity International believes it is unsurprising that so far in H2 2024, there have been signs that the S&P 500 is broadening beyond tech leadership, with some non-tech sectors surpassing the broader market.
There are abundant high-quality stocks apart from the popular names. This means that dozens of companies in the S&P 500 continue to offer a return on invested capital (ROIC) and earnings growth of more than 30%. This is true for several other quality metrics, reflecting an underappreciated depth of opportunity in the broader US equities.
While diversification remains critical, even looking beyond the Magnificent Seven might not necessarily offer the required diversification considering that the US market remains heavily weighted towards growth sectors like IT. As per Fidelity International, diversified portfolios need negative correlations between assets, but few styles provide consistent negative correlations to quality growth companies. That being said, cyclical value and defensive value remain 2 key exceptions.
To get a negative correlation, the investors are required to avoid an overlap at the stock level. As of now, the US market provides a range of attractive stock opportunities that offer this valuable diversification.
As per ClearBridge Investments, the top 5 stocks now constitute ~27% of the S&P 500 and the top 10 make up ~37%. As per the investment firm, this concentration might stagnate near current levels, with mega caps delivering solid, but slower, earnings growth in comparison to the recent past. The investment firm expects that diversified portfolios should outperform in the upcoming 12–18 months.
With this in mind, we will now have a look at 10 Wonderful Stocks to Buy Now at a Fair Price.
Our methodology
We first sifted through multiple online rankings and ETFs to identify quality stocks with wide moats. Next, we selected stocks that were trading at a forward P/E of less than ~23.65x (since the broader market trades at a forward multiple of ~23.65, as per WSJ). The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A healthcare team discussing strategies for patient advocacy programs.
The Cigna Group (NYSE:CI)
Expected Earnings Growth: 13.6%
Number of Hedge Fund Holders: 66
Forward P/E Multiple (As of September 30): 10.81x
The Cigna Group (NYSE:CI) offers insurance and related products and services in the United States.
The Cigna Group (NYSE:CI)’s diversified and complementary business lines, together with its comprehensive medical plan services and coordinated solutions, continue to form a wide economic moat. Moreover, its unique managed care organization business emphasizing pharmacy benefit management, specialty pharmacy services, and employer-based medical insurance should continue to act as critical tailwinds for long-term growth.
The pharmacy benefit services business, Express Scripts, should continue to be aided by strong client demand and innovation. While The Cigna Group (NYSE:CI) remains on track to divest Medicare Advantage business by Q1 2025, it reaffirmed its commitment to negotiating affordable pharmaceutical prices and is confident about achieving the growth targets for 2024 and beyond. The Cigna Group (NYSE:CI) expects continued growth in US employer Select and Middle market segments.
Despite the potential softening in the employer marketplace, the company expressed confidence in securing appropriate pricing for 2025. The Cigna Group (NYSE:CI) remains focused on offering access to the lowest-cost and best-available solutions, including biosimilars. The company expects growth opportunities in specialty areas, which include new therapies and expanding relationships. Given the strategic investments in innovative programs and a focus on affordability and value, The Cigna Group (NYSE:CI) remains well-placed to maintain a competitive edge.
Cantor Fitzgerald reaffirmed an “Overweight” rating on the shares of The Cigna Group (NYSE:CI), issuing a price target of $400.00 on 16th September. Out of 912 hedge funds we tracked at the end of Q2 2024, The Cigna Group (NYSE:CI) was in the portfolios of 66 hedge funds.
Overall, CI ranks 4th on our list of Wonderful Stocks to Buy Now at a Fair Price. While we acknowledge the potential of CI as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than CI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.