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Health insurers have been a relatively bright spot in an otherwise dreadful market this year. While the S&P 500 is down 19% year-to-date, the iShares U.S. Healthcare Providers ETF (IHF) has only fallen 8% and top insurers, including UnitedHealth (UNH) and Humana (HUM) are up 3.5% and 4.9%, respectively. Both companies could see their shares continue climbing, but it’s Humana that could be the better buy now.
A ‘sweet spot’ insurer
A looming recession means hiring plans are slowing, and deteriorating margins could mean layoffs, creating headwinds for insurers heavily exposed to employer-based insurance.
While Humana isn’t the largest health insurer in the country (UnitedHealth earns that trophy), its 18% market share makes it the second-largest player in the Medicare Advantage market behind UnitedHealth. However, unlike UnitedHealth, which generates about 45% of its revenue from individual and employer-based health insurance plans, the lion’s share — roughly 89% — of Humana’s revenue comes from federal programs like Medicare.
Since Humana generates more of its revenue from Medicare, and Medicare enrollment is more inelastic to economic whims and whispers than employer-based health insurance, it may outperform competitors if the economy weakens.
An increasingly holistic approach
Historically, healthcare has been incredibly fragmented with insurers staying mostly in their own lane. However, those lines have blurred in the past decade as insurers have entered the pharmacy and provider businesses either organically or via acquisition.
Humana is no different. Its pharmacy benefit manager (PBM) business has grown to become the fourth-largest player in the country, and last year, it acquired the leading at-home care provider — Kindred at Home — to establish itself in that market.
Similarly, Humana’s investing heavily in primary care centers under its CenterWell brand. It currently operates 214 centers, and it plans to have 250 open by year’s end, with an additional 30 to 50 centers opening annually thereafter. These centers allow Humana to cross-sell other services, including pharmacy, while also bringing costs it previously paid to third parties in-house.
The company’s pharmacy business has been especially successful. In Q1, 38% of Humana insurance members used Humana’s pharmacy to fill prescriptions, up 1% year over year. As a result, management cited its strength as a driving force behind its better-than-forecast $8.04 in earnings per share (sidebar: Humana has beaten analyst earnings estimates in 15 of the last 16 quarters.)
Medicare Advantage is a growth market
Today, 28 million Americans — less than half of eligible seniors — are enrolled in Medicare Advantage plans. As seniors seek ways to reduce costs in retirement, especially amid inflation, more are likely to embrace them.
Traditional Medicare Part A and Part B require coinsurance and they don’t include caps on the maximum members have to pay out-of-pocket. Similarly, expensive items commonly required by seniors, such as hearing aids, glasses, and medicines (unless you’re also enrolled in a Part D drug plan) aren’t covered. For example, coinsurance kicks in for hospitalization after 60 days in Part A, and once you’ve paid your deductible, coinsurance on provider care is 20% in Part B.
Since many Medicare Advantage plans cap out-of-pockets, provide drug coverage, and cover other items, like hearing aids, seniors are naturally inclined to consider if they make sense.
However, that’s not the only tailwind supporting demand for Humana’s plans. In 2019, there were 54 million Americans over age 65, up 36% since 2009 because of aging baby boomers. Those demographics have been a boon for Humana. In 2012, its revenue totaled less than $54 billion and its EPS was $7.47. In 2021, its revenue was over $83 billion and its EPS was $20.63. This year, management expects EPS will be $24.50, partly because of better-than-hoped enrollment trends.
Since estimates suggest there will be 81 million Americans over age 65 in 2040, the ‘aging of America’ is likely to continue rewarding investors with revenue and profit growth.
A good time to buy?
A look at the charts suggests Humana could have more running room from here.
In “Humana Breaks Out of a Huge Consolidation Pattern,” Real Money technician Bruce Kamich paints a bullish picture, writing:” Shares of Humana traded sideways from the middle of 2020 but now they look like they finally are breaking out on the upside.”
Kamich’s bullishness stems from the fact Humana’s share price has been consolidating since May of 2020, providing a solid base for upside with little overhead supply (trapped investors overhead itching to sell their shares.)
Back to Kamich:
“In this daily bar chart of HUM, below, we can see that prices made a number of rallies to the $470 area before recently breaking out to a new high for the move up… Prices are training above the rising 50-day and the bullish 200-day moving average lines. The daily On-Balance-Volume (OBV) line shows a sideways move from February, but in late June the line turns upward ahead of the price breakout into July. The Moving Average Convergence Divergence (MACD) oscillator is in a bullish alignment above the zero line.”
As a reminder, OBV is essentially a running total of up-day volume minus down-day volume, and when it’s trending higher, it’s bullish. Meanwhile, MACD subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish signal triggers when that result is above zero, or the 9-day EMA.
The weekly chart is similarly encouraging. Kamich writes, “In this weekly Japanese candlestick chart of HUM below, we see a mostly bullish picture. Prices are trading above the rising 40-week moving average line. The latest weekly candle shows us a small real body with upper and lower shadows, suggesting a balance between bulls and bears…The weekly OBV line shows a rise the past three years and confirms the price strength. The MACD oscillator is in a bullish alignment above the zero line.”
Although Kamich thinks shares can head higher, he does note that volume on the daily chart has been a bit anemic on this move up and “A bearish candle pattern this week could turn this into a top reversal pattern.” Nevertheless, his math using point and figure charts pegs a $591 price target on the daily chart and $627 on the weekly chart.
As a result, Kamich concludes “Traders could go long [Humana] in the $480-$470 area if available. Risk to $450. The $590-$600 area is our price objective.”
The Smart Play
Humana has a lot of potential tailwinds. There are secular demographics supporting Medicare Advantage demand and shorter-term, increasing interest in exposure to healthcare stocks because revenue is less elastic to recession could support shares.
Nevertheless, few break-outs have followed through with additional upside this year. Instead, investors have been viewing breakouts as a source of cash, causing shares to retreat back to support.
For this reason, you can consider taking a one-third position in Humana now, and then increasing exposure toward a full position if it retreats back down to Kamich’s $470-480 target range. At that point, shorter-term investors could establish a stop-loss below $450 to control risk as Kamich suggests.
If you believe (I do) that cost-conscious older Americans will increasingly turn to Medicare Advantage plans, and Humana’s expanding services in pharmacy, homecare, and primary care can boost margin (and increase membership retention), then it could be a good time to tuck this health insurer into your portfolio.
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