(FORTUNE Magazine) – When J.P. Morgan's Scott Fidel upgraded his rating on insurer Cigna (CI, $68) to overweight on Nov. 9, it was hardly an obvious move. Not only was the stock trading near a 52-week high, but analysts at Goldman Sachs and elsewhere had just issued downgrades. Days later Cigna was sued by the state of California for allegedly paying kickbacks. (The company denies violating any law or regulation.) Undaunted, Fidel argues that Cigna is a classic value stock that's worth buying because of all the pessimism. -- David Rynecki

Why be a bull on Cigna now?

The stockis near a 52-week high, but it's been out of favor the past few years.

What's been the problem?

Cigna attempted a major systems conversion a few years ago that was a huge disappointment. It was supposed to improve service. Instead service deteriorated. Call centers got backed up. Claims weren't paid in a timely manner. That led to some unhappy customers. When corporate customers threatened to leave, Cigna panicked. It provided price concessions, and that hurt margins.

Are those days over?

It's been a difficult time for Cigna, while the rest of the industry has performed well. Sentiment is still quite negative. I myself had an underweight on the stock as recently as last year. But we see the turnaround stabilizing. Over the past three quarters--and I think this is a leading indicator of stability--Cigna's medical claims costs have come in at a lower level than Cigna had estimated. Since medical-claim margins are the primary driver of earnings, the company's financial performance has improved.

You're a former health-care lobbyist. Is Bush's reelection good for the sector?

I think so. President Bush has been a supporter of private health plans, including the privatization of Medicare. That provides an opportunity for the managed-care plans to participate in Medicare. Cigna would also benefit from the expansion of health savings accounts that Bush advocates.

What about all the lawsuits swirling around the insurance industry?

There is a lot of litigation risk around these companies. If tort reform was passed, that could provide some comfort to investors.

So why buy the stock now?

This is a textbook value call that we see working over the next 12 to 24 months. The real catalyst is that Cigna still has considerably lower margins--by as much as 25%--than its core competitors like UnitedHealth, Aetna, Anthem, and Wellpoint. That points to opportunity for value investors. Our view is that if the company can just stabilize its business and bring its margin more in line with the industry, there is a lot of potential earnings power. We're not saying Cigna is about to enter a golden era or that it is going to dramatically take market share from competitors. In fact, we expect it to lose 10% more of the membership in 2005. But there's value in the company.