We're adding a Bullpen stock to the portfolio, one day after putting it on our watch list

Published Tue, Apr 19 202211:49 AM EDTUpdated Tue, Apr 19 20223:01 PM EDT

We're initiating a position in Humana (HUM), buying 75 shares at roughly $459 each. Following Tuesday's trade, HUM's weighting in the portfolio will be 1.04%. We're calling up Humana from the Bullpen, one day after adding the stock to our watch list . The health insurance company largely makes money through Medicare plans sold to retail customers. On a high level, Humana shares were crushed back in January after management reduced its full-year 2022 individual Medicare Advantage (MA) membership growth outlook to a range of 150,000 to 200,000 from 325,000 to 3750,000. That implies a growth rate of about just 3.5% versus the previous growth rate of about 7%. This news worried investors about the company's competitive positioning due to loss in market share. Without question, management dropped the ball earlier this year and the stock price suffered. But as we reported Monday, recent checks by analysts at UBS suggest Humana can get back to its typical above-market rate sooner than expected. That would be great for the stock. UBS believes one of the root causes behind the membership decline during the annual enrollment period was related to compliance requirements. UBS called these issues "easily addressable" and they think management will be ready for the 2023 period. UBS also cited their analysis of Humana's core MA markets — California, Georgia, Florida and Texas — and pointed out that those areas are growing faster than the overall market rate. But we believe Humana also needs to invest for growth to regain its lost market share. That's where Humana's value creation plan comes into play. Management is committed to unlocking $1 billion of additional value through cost savings, productivity initiatives, and value acceleration from previous investments. Some of the savings should help Humana operate at a higher margin in the future, but we expect a large part will fund growth and investments in Medicare Advantage and further expand some of the company's health care capabilities. If Humana funds its Medicare Advantage growth by taking out costs, what this means is that MA can accelerate without sacrificing to near-term margin. Humana typically grows its earnings at a consistent low teens percentage clip, and this cost savings program will help Humana quickly take back share without pressure on profits. As we cited Monday, 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, Lastly, we like how Humana is a 100% domestic company, meaning it gets all of its revenues from the United States. This is the type of stock the market loves when there are concerns about a recession in Europe or lockdowns in China. We are initiating Humana with a price target of $520, which represents roughly 19x 2023 consensus EPS. We believe HUM's multiple will expand as the company's MA growth rate accelerates above the industry growth rate and if management can trace out a path to margin expansion. The currently multiple is roughly 17x 2023 earnings. (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A Wall Street subway station near the New York Stock Exchange (NYSE) in New York, on Monday, Jan. 3, 2022.

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