The sell-off in Humana is overdone after strong earnings. Jim Cramer says buy the stock

Published Wed, Nov 1 20232:15 PM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

The post-earnings decline in Humana (HUM) shares Wednesday was overdone, providing investors an opportunity to add to their positions in the Medicare Advantage-focused health insurer. The Club holding remains on solid ground after delivering a top- and bottom-line beat in the third quarter. Revenue for the three months ended Sept. 30 rose 15.9% to $26.42 billion, topping analyst estimates of $25.55 billion, according to data provider LSEG, formerly known as Refinitiv. Adjusted earnings per share (EPS) of $7.78 exceeded the consensus estimate of $7.16. Humana's companywide benefits expense ratio — also known as the medical loss ratio or MLR — came in at 86.4% in the quarter, below the 86.7% projected by analysts, according to FactSet. On this metric, lower is better. However, Humana's insurance segment MLR came in higher than expected, which was part of the reason for the stock decline. HUM YTD mountain Humana YTD Humana's quarter has some blemishes, but we see no reason to join the parade of sellers who are pushing the stock down more than 5% to under $500 per share. "The story is on track, and I think you buy the stock," Jim Cramer said during Wednesday's Morning Meeting . "But you have to understand and respect sellers who are all trying to get out at once and don't even realize they've created an opportunity. It should no longer be sold down here. I would be a buyer of Humana at the end of the day." Bottom line Ultimately, Humana's recent outperformance made the stock vulnerable to pullback on an imperfect report. Since its 2023 lows on July 13, Humana stock rallied more than 23% compared with a roughly 7% slide in the S & P 500 over the same stretch. More recently, Humana shares are up nearly 5% since Oct. 12 — the day before rival UnitedHealth Group 's (UNH) strong quarterly results — while the S & P 500 dropped 3.6%. We booked profits on our Humana position on Oct. 6, making good on our pledge to trim once the stock recovered to the $500-per-share level. One of the third-quarter blemishes: Humana experienced higher-than-anticipated medical costs in the period due to an increase in Covid-related hospital admissions, leading its medical loss ratio, or MLR, in that segment to come in above expectations. Given these recent trends, the company had to increase its full-year insurance MLR guidance to 87.5%, up from its prior target range of 86.3% to 87.3%. Quarterly commentary Investors have been concerned about medical costs for Humana and its insurance peers since June, when UnitedHealth first warned about a rise in elective procedures — and soon after, Humana said it was seeing similar trends. While second-quarter earnings assuaged the worst of Wall Street's fears , Humana's Q3 report Wednesday appears to have created some fresh jitters around medical costs, or utilization. The companywide benefits expense ratio of 86.4% can be seen on the quarterly earnings table. At the same time, CFO Susan Diamond offered helpful context around what changed in the third quarter, explaining that the company did not expect to see an uptick in Covid admissions until the final three months of the year. The company decided to be "somewhat conservative" and leave its fourth-quarter Covid assumptions unchanged, Diamond said, despite the possibility that some of those costs were pulled forward into the third quarter. Humana has started to see Covid-related costs decline, Diamond said. Management's initial commentary on 2024 earnings and Medicare Advantage membership growth — discussed in more detail below — may also have left investors wanting. While these developments are not ideal, we think Humana also may be offering a conservative view on 2024. That is an understandable approach to take given it's still early in the enrollment cycle, and next year will be one of transition for the company. CEO Bruce Broussard, who has led the insurer for a decade, is set to retire in late 2024, the company announced in October. His replacement, health-care veteran Jim Rechtin, is slated to join Humana in January and work closely with Broussard on the leadership hand-off. Outlook Once again, Humana boosted its projections for 2023 individual Medicare Advantage membership growth — this time by 35,000 to approximately 860,000 members. That would mark a 19% increase compared with year-end enrollment levels in 2022. Humana's initial 2023 guidance — put forth a year ago — forecasted growth between 7.1% and 8.7%. Humana raised its full-year insurance segment MLR guidance to 87.5%, up from its prior target between 86.3% to 87.3%. For months, the company had said it expected to come in near the top of the old range, but the third-quarter medical cost trends prompted Wednesday's upward revision. Remember, on this metric, lower is better. Humana maintained its full-year adjusted EPS projection of at least $28.25 while lowering its EPS outlook on a generally acceptable accounting principles (GAAP) basis. The company now expects GAAP EPS of at least $26.31, down from at least $26.91. Looking ahead to 2024, Humana expects its Medicare Advantage membership growth to be "at or above industry growth level," after significantly outperforming the industry in 2023. On the call, outgoing CEO Broussard said industry growth estimates vary for 2024, but offered a range between 6% to 8%. Humana also expects EPS growth in 2024 to fall on the lower end of its historical long-range 11%-to-15% target. Wall Street had been projecting around 13% EPS growth in 2024, according to FactSet. Capital allocation Humana still expects to buy back about $1.5 billion worth of stock in 2023, finance chief Diamond said on the earnings call. So far, repurchases have totaled roughly $1 billion, implying about $200 million worth of buybacks between August's earnings call and Wednesday's call. (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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In this photo illustration, Humana Inc. logo seen displayed on a tablet.

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The post-earnings decline in Humana (HUM) shares Wednesday was overdone, providing investors an opportunity to add to their positions in the Medicare Advantage-focused health insurer.

The Club holding remains on solid ground after delivering a top- and bottom-line beat in the third quarter.