Here's why we're adding a beer stock and a health-care name to our Bullpen watch list

Published Mon, Apr 18 20222:18 PM EDTUpdated Tue, Apr 19 20222:43 PM EDT

We're adding two companies to our Bullpen, a collection of stocks identified as having the potential to be added to Jim Cramer's Charitable Trust , whose holdings serve as the portfolio for the Investing Club. These are companies that we view as high quality and will monitor outside the current portfolio. However, there's no guarantee when, or if, we would initiate a purchase. Also, adding a stock to the Bullpen does not necessarily mean we would buy it at the current price. Before initiating a position, we typically wait for certain events to unfold — both company-specific and macro-oriented — or a more attractive entry point. The current makeup of the portfolio may also delay an initiation in order to keep it diversified. Ultimately, the Bullpen should be treated like a watch list and an outside area to perform homework and due diligence. New Bullpen additions Constellation Brands (STZ) is a premium beer, wine, and spirits company. It's best known for its Mexican beer portfolio, which includes Corona, Modelo, and Pacifico, the kind of beer people love to drink in the summer months. The company recently reported strong financial results for its fiscal fourth-quarter, the three months that ended in February 2022. It's a great sign of momentum as we head into the summer, the busiest time for the business. This momentum from the quarter did not translate into fiscal 2023 guidance, which came in slightly softer than expected, leading us to believe management's forecast was conservative. Despite the guide, the stock rallied on earnings day thanks to the strong operational performance, and the announcement of an accelerated $500 million share repurchase authorization. Lastly, we like how the founding Sands Family has proposed ending Constellation's dual-class common stock structure . Even with the premium investors are expected to pay and the share dilution that would occur, the result should be a net positive for shareholders. If the company sheds its dual-class structure, the overhang related to the Sands Family's voting control will be removed, likely resulting in price-to-earnings multiple expansion. All else being equal, investors prefer buying stocks with single-class structures because of control. At 22x forward earnings, STZ is a GARP, growth at a reasonable price, name to begin with, leaving plenty of room for a re-rating. Humana (HUM) is a health and well-being company. It mainly gets its revenue through Medicare benefits to retail customers, marketed to individuals or directly via group Medicare accounts. Shares were hit hard in January after the company reduced its full-year 2022 individual Medicare Advantage membership growth outlook to a range of 150,000 to 200,000 from 325,000 to 3750,000. The disclosure was a shock to many as it implied total Medicare Advantage membership was expected to grow this year by about 3.5%, a much slower rate from Humana's previous 7% growth rate. Even though Humana backed its adjusted earnings-per-share outlook for 2022 that day, the Medicare Advantage update caused many to believe Humana priced its plans too conservatively and lost market share to competitors. Humana fell 19% to roughly $367 per share on the news. With Humana's slowdown in Medicare Advantage and how quickly it can accelerate growth representing the biggest question mark among investors, a recent check by UBS suggests Humana can get back to an above-market rate sooner than many think. In an April 13 research note, the UBS analysts upgraded their Humana rating to a buy on the belief that there is a path to faster member growth and better margins. "Our channel checks pointed to increased compliance requirements being the root cause of the membership decline during AEP [annual enrollment period]. However, these issues appear to be easily addressable and we believe management understands and is addressing these issues for the 2023 AEP. We also believe the CMS final rate notice can serve as an opportunity for HUM to increase its 2023 benefit design more meaningfully than competitors. Our analysis suggests HUM's core MA markets are already growing faster than market, thus we now model 11% individual MA member growth, above the 7% industry estimate" UBS wrote in a research note. In addition to better all-around execution, one of the keys to getting Humana's growth back on track is its value creation plan. Humana recently announced a commitment to driving $1 billion of additional value through cost savings, productivity initiatives, and value acceleration from previous investments. Part of the $1 billion in savings is expected to fund growth and investments in Medicare Advantage and further expand some of the company's health care capabilities. We like this because it means Humana should be able to accelerate Medicare Advantage growth without sacrificing margin. Some other things to know: Activist hedge fund Starboard Value is pushing Humana to make changes. We believe Starboard's presence is positive due to the firm's excellent track record. On Feb. 22, Humana announced a board refreshment plan as part of a cooperation agreement with Starboard, run by Jeff Smith. We also like how Humana is a 100% domestic company, meaning the business has zero direct exposure to events outside the United States, like Russia's invasion of Ukraine or Covid lockdowns in China. On valuation, we think HUM is an inexpensive stock relative to its consistent low double-digit earnings per share growth rate. HUM currently trades at roughly 18x forward earnings, one turn below the company's five-year average P/E. If Humana can prove it can return to above industry membership growth and trace out a path to margin expansion, we think it would be very reasonable to see the P/E multiple expand back to its 5-year average or even higher, narrowing the gap with UnitedHealth Group , which trades at a rich forward multiple of roughly 24x. (See here for a full list of the stocks in Jim Cramer's Charitable Trust and those in the Bullpen .) 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. 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People walk along Wall Street near the New York Stock Exchange on March 08, 2022 in New York City.

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