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Portfolio Update

Kicking Butt and Taking Profits

By Elliott H. Gue, on Nov. 12, 2014

Aetna (NYSE: AET)

AET Price Graph

Aetna reported strong third-quarter results, beating the consensus estimate for revenue and earnings and raising its guidance for 2015. The stock trades near the top end of its 52-week range and has rallied 33 percent since we added the position to the Lifelong Income Portfolio.

The stock also probably gained some momentum from the Republicans winning enough seats during the midterm election to take control of the Senate, boost its majority in the House of Representatives and control the governor’s mansion in almost two-thirds of US states.

Some investors likely bet that the Republicans will leverage their strength to revise parts of the Affordable Care Act in ways that would benefit health insurers.

But at these levels, the stock has priced in much of this upside potential; having bought the rumor, the market may turn around and sell the news.

We’re also concerned about rising costs in Aetna’s commercial business, which was concentrated among individual plans and those offered by small and midsize businesses.

Management dismissed this headwind as an aberration associated with one-off factors, but uncertainty about how health care reform will affect the company’s bottom line remains a long-term challenge.

We’re selling Aetna for a 33 percent gain.

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