Humana Stock: Time for a Defensive Portfolio Strategy (NYSE:HUM)


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Investment thesis

Stock prices are difficult to predict, but the market is riskier at many times than others. With renewed political tension and macroeconomic uncertainty, it may make sense to adopt a more defensive strategy and buy stocks in companies whose profits remain stable through economic cycles. Human (NYSE: HUM) derives more than 90% of its income from government-sponsored employee benefit programs, providing a sustainable and predictable income stream that is matched by only a few. Added to this is the inherent defensiveness of health services, inflexible consumer behavior and a leading market position as Medicare’s second-largest provider, with an 18% market share in 2021.

Medicare Advantage enrollment by company

Medicare enrollment by company (Kaiser Family Foundation)

Revenue Trends

Most Americans agree that the federal government should take care of the elderly and the poor. The Medicare and Medicaid programs have operated since 1965, and Medicare, from which HUM derives more than 80% of revenue, benefits popularity among voters. It is useful to remember this in the midst of the heated debate over budgetary expenditure on health.

I don’t believe Republicans or Democrats have the will to cut Medicare payments as it impacts service levels. Reimbursement rates have increased each year, despite 2020, when the Center of Medicare and Medicaid Services “CMS” adjusted Medicare Advantage “MA” payments to reflect lower utilization due to lockdowns.

Humana revenue by segment

Humana revenue by segment (Author’s estimate based on HUM documents)

Current discussions at CMS revolve around initiatives to increase efficiency, such as facilitating the creation of integrated delivery systems for patients with multiple chronic disease “MCCs”, often requiring coordinated care from different centers of care. Without coordination, inefficiencies occur, for example, duplicate diagnostic tests, despite fragmented treatment lines that are not necessarily the optimal treatment. HUM does not provide the number of MCC registrants. However, industry spending follows the 80/20 rule, where 20% of its registrants are responsible for 80% of spending.

CMS also invests in preventive and primary care initiatives as a way to reduce hospitalization, such as mandated by the ACA law. Investing in primary care as a way to reduce total healthcare costs is a strategy embraced by the class of recently IPO managed care startups, including Alignment Healthcare (ALHC), which states:

If a single visit by a nurse to a high-risk seniors’ home prevents an avoidable hospitalization, then that visit represents a 30 to 1 return on investment. ALHC Annual Report

There’s a lot happening on the regulatory front regarding healthcare spending beyond the initiatives mentioned above, such as the Cut Inflation Act and ACO Reach, both of which will come into force in 2023. Yet, contrary to popular opinion, cutting Medicare services to control costs is not something that comes up often. It is from these political dynamics that HUM draws the stability of its income.

In addition to sales visibility, HUM enjoys the advantages of its size, granting it volume bargaining power matched by few. The ACA Act set maximum gross profit margins for health insurers at 15%. However, HUM’s cost savings allow it to reinvest in expanded coverage, far exceeding that of traditional health insurance (health insurance offered directly by the CMS.) For example, Humana Gold More (H5619) provides free drug coverage, which would have cost an enrollee between $145 and $935 (depending on income) under traditional health insurance. For this reason, an increasing number of people are opting for Medicare Advantage instead of Traditional Medicare.

Medicare Advantage Penetration

Medicare Advantage Penetration (Kaiser Family Foundation)


Insofar as pure MA players are sought, investors are practically faced with two choices; HUM and United Health (A H). Both companies have a stated goal of 13% annual EPS growth. Still, HUM will most likely exceed this target, given the sale of the Kindred hospice assets and management’s decision to use a portion of the proceeds to repurchase stock (in addition to reducing debt).

It can be argued that UNH is more diverse than HUM, having maintained its commercial business segment and expanded into healthcare provider business. However, it can also be said that these businesses are more risky and sensitive to economic trends than Medicare, which makes up the bulk of HUM’s sales.

Both companies have outperformed the market this year as fund managers have taken a defensive stance in their portfolios in light of growing recession risks. However, unlike UnitedHealth (A H), HUM’s price multiples remain close to historical averages, making it our preferred choice between the two, with the highest probability of capital appreciation, as opposed to UNH, whose trade appears to have sold out.

Data by YCharts


HUM stocks have outperformed the market this year as smart money seeks protection from political and macro disruptions. Given the renewed political tensions and high level of uncertainty, it might be wise to adopt a more defensive strategy, gaining portfolio exposure to MA companies.

HUM enjoys a steady stream of revenue primarily from government-sponsored health care benefit programs. The political risks exist, but if Is legislative support for the Medicare Advantage program. The program is unlikely to see fundamental changes until at least the end of the current administration’s presidency. Privatizing health care is also impractical for reasons beyond the scope of this article. This momentum, coupled with moderate price valuation multiples, at least relative to its closest counterpart, makes HUM one of the best defensive trades in the market today.

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Don F. Davis