We're adding to a health insurance stock on the dip that had great earnings

Published Wed, May 18 20222:44 PM EDTUpdated Wed, May 18 20228:38 PM EDT

We're buying 15 shares of Humana (HUM) at roughly $418.13 each. Following Wednesday's trade, the portfolio will own 245 shares of HUM, increasing its weighting to about 3.59% from 3.38%. Markets were falling sharply again Wednesday after a second downbeat earnings report from a big-box retailer in as many days. Quarterly numbers from Club holding Walmart (WMT) on Tuesday and then Target on Wednesday provided some confirmation about what investors fear most in terms of inflationary pressures. They're shrinking the budgets of consumers and costs rising faster than what even some of the largest corporations in the world with scale can pass through. The result is companies eating the higher expenses at a sacrifice to their own margins. We're viewing Wednesday's broader market weakness as an opportunity to pick up more shares of health insurance company Humana. While down 5% in afternoon trading, Humana's roughly 9.5% year-to-date decline isn't nearly as much as the S & P 500 's more than 17% drop since the start of 2022. Humana's 52-week low was in January after management provided a softer than expected Medicare Advantage growth outlook for the year and the stock has risen and moved sideways since then. The S & P 500's trend has been lower since its all-time high in early January, hitting its 52-week low just last week and testing it once again Wednesday. Humana got off to a solid start this year , reporting at the end of last month a strong first-quarter earnings beat and a full-year outlook raise. Additionally, we think that rosier guidance may still be conservative, setting management up for more small beats and raises throughout the year. Included in the outlook is a $1 per share headwind to cover a possible reemergence of a widespread Covid outbreak that could push up medical expenses again and ding earnings. We believe Humana's $1 billion value creation program sets the company apart during these times of uncertainty and rampant inflation. Through this program, management is committed to unlocking $1 billion of additional value this year through cost savings, productivity initiatives, and getting the most out of previous investments. We don't think the full $1 billion will flow directly to the bottom line because management plans to use those expected savings to fund growth and invest in their Medicare Advantage business by offering more benefits at competitive pricing. However, we think this source of funds should be viewed more positively by the market as it will help re-accelerate growth in Medicare Advantage without sacrificing margins. Many feared that Human's losses in market share in at the beginning of 2022 would necessitate margin adjustments to gain back share. Another thing to keep in mind is that Humana gets 100% of its revenue within the United States. So whenever Humana shares get pulled down alongside a broader market selloff in reaction to concerns about Covid lockdowns in China, Russia's war in Ukraine, or any other global supply chain issue, we think that could provide an opportunity. (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.

Carol Berman, of West Palm Beach, Fla., speaks with pedestrians about the need for policymakers to protect Medicare Advantage benefits during the Coalition for Medicare Choices' Medicare Advantage Food Truck stop on North Capitol Street in Washington.

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