Risky Prognosis for a Cigna Turnaround

Turnaround investing has an allure for investors because there's big money to be made if you're right. Companies knocked flat on their back are generally heavily discounted on Wall Street. Usually all of the bad news -- and then some -- is fully discounted in the stock price.

But that doesn't mean turnaround investing is safe. It's far from it. Consider insurance company Cigna (CI - commentary - Cramer's Take), which disappointed investors with a poor earnings outlook Friday. Its stock dropped 40% to $39, a six-year low.

Weakening Pulse Cigna tumbles after signaling a shortfall

Any turnaround investors worth their salt are working through Cigna's financials right now, trying to sort through the risks vs. rewards of buying the stock. At first blush, it's an appealing idea. The stock is selling at less than one-third of its $137 peak, reached 18 months ago. Its price-to-earnings ratio is just 7 on next year's estimated earnings, with a dividend yield of 3.3%, and with net assets near its current market capitalization (before upcoming restructuring charges).

But a closer look at Cigna shows that investing in its stock is fraught with risk. Any systematic review of a turnaround starts with an assessment of financial strength (i.e., the balance sheet) and winds its way through operations to an eventual appraisal of management. Here are my notes on each of these as they pertain to Cigna:

Balance Sheet

A review of quarterly changes in Cigna's balance sheet shows a company that is weakening at an alarming rate. After the write-offs and restructuring charges announced last week, net assets will be roughly $28 per share. Subtract intangibles and an upcoming adjustment for an underfunded pension plan, and net tangible assets drop to less than $12 per share, substantially less than Friday's close of $39. My calculation doesn't include an upcoming major charge for restructuring operations, expected in the fourth quarter.

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Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, neither Alsin nor ACM held a position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to [e-mail]. Click here to receive Arne's latest favorite stock picks from his newsletter, The Turnaround Report.