With recession fears weighing on the stock market, we’ve adjusted our positioning in the portfolio to get more defensive and own names that can hold up during an economic slowdown. Corona parent Constellation Brands (STZ) and health insurer Humana (HUM) are two prime examples, which we added to our portfolio in early May and mid-April, respectively. We continue to believe both names are worth buying at present levels. We already scooped up 25 shares of Constellation Brands on Tuesday morning and wanted to drill down further here on our belief in Humana, which we’re currently restricted from trading. “I think this is another fabulous opportunity,” Jim Cramer said in Tuesday’s “Morning Meeting.” “In a slowdown, Humana does great, and they’re just a big cash generator. It’s another stock to buy.” Driving some of that optimism is what Humana CEO Bruce Broussard told Cramer in an interview Monday night, discussing his company’s resiliency during recessions, progress on its cost-cutting initiative and the lessening impact of Covid on business. Our confidence in Humana’s fundamental business is paired with an attractive stock valuation that carries upside potential. Humana’s forward multiple of 16.4 is below its five-year average of 18.3, and investors may be more willing to pay up for the stock in the future if Medicare Advantage growth gets above the industry average and margins expand. Weathering slowdowns Even though we don’t expect the U.S. economy to plunge into a steep recession, our decision to start a position in Humana in April was done to make our portfolio more defensive. This uncertain moment calls for it. Asked by Cramer if “there are any people who simply don’t pay their health insurance when times get tough,” Broussard responded with the following: There’s a few, but not many. Health insurance and health care is on top of people’s top of the list to pay. The Great Recession lasted from December 2007 to June 2009. Humana’s top line revenue grew year over year in 2007, 2008 and 2009. Its net income fell in 2008 compared with 2007, as a rise in operating expenses weighed on profitability. However, net income rebounded nicely in 2009 as the economy improved — up almost 61% year over year and nearly 25% from 2007 levels. Its benefit ratio, which can also be called medical loss ratio, worsened in 2008 before rebounding in 2009, reaching a level that year that is considered better than where it was in 2007. Medicare Advantage Humana shares had a rocky start to the year, after the insurer in early January cut its estimate for Medicare Advantage growth in 2022. That caused the stock to plunge and, as of Tuesday, it traded below the price at which it closed on Jan. 5, the day before Humana released the updated guidance. We’ve been pleased with how management has responded to the higher-than-expected Medicare Advantage terminations Humana saw during the annual election period in 2021. Broussard addressed the situation again Monday. Medicare Advantage is really where we focus. At the end of last year, we stumbled. Our product wasn’t where it should’ve been in value. We actually announced a $1 billion cost-cutting effort, and that is really going well, and we’re reinvesting it into the product. This year, we’ll do quite well as a result of that. Medicare Advantage (MA) plans are another way for Medicare recipients to get their hospital and health insurance, known as Part A and Part B, respectively. Private insurers like Humana offer these Medicare Advantage plans, which typically include drug coverage, too, and the companies then compete for enrollees. Humana had originally said it expected to add between 325,000 and 375,000 Medicare Advantage members in 2022. Its revised projections issued in January called for additions between 150,000 and 200,000. The company’s first-quarter results, which were reported in April, appeared to show the MA businesses getting back on track. That was welcome news for the Club, but our big-picture investment thesis emphasizes an acceleration of the MA business in 2023. Impact of Covid To be clear, Covid is not behind us yet in the U.S. However, it’s clear the impact of the disease is different now than it was a year ago and even more different than it was two years ago, when there was no vaccine or therapeutics available. This is important for a company like Humana, particularly as it relates to things like its enrollees getting sick with Covid and ending up in the hospital. That’s why Humana’s full-year earnings per share guidance of roughly $24.50 includes a $1 Covid headwind. It’s worth pointing out that Humana’s inpatient utilization has been lower than expected so far its current quarter, according to Jefferies analysts. In a note to clients last week, the analysts pointed to recent comments from Humana CFO Susan Diamond and said the lower utilization is partly because Covid-related “hospital days has remained low,” despite an uptick in coronavirus cases. “Mgt’s $1 in [Covid] costs earmarked in its FY22 guidance appears unutilized,” they wrote. The Center for Disease Control and Prevention’s most recent data shows the seven-day average of Covid hospitalizations is about 80% below its peak earlier this year. That’s good news for society overall, of course. It’s also good news for Humana. Here’s what Broussard had to say on Covid and what it means for Humana going forward: I would say it’s like the flu. It comes and goes. I wouldn’t call it a tailwind. I would call it more normalized now. … It’s more part of the population and we can plan for that in a much-more effective way. (Jim Cramer’s Charitable Trust is long HUM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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The Humana headquarters office stands in Louisville, Kentucky.
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