Shortly after the opening bell, we will exit our position in Humana , selling 85 shares at roughly $388. Following the trade, Jim Cramer’s Charitable Trust will no longer own shares in the managed care provider. Humana shares are falling in the premarket on a couple of negative updates that are meaningful enough to change our investment thesis — forcing us to sell the rest of our very small position. Entering Thursday, Humana was the fourth-smallest weighting in the portfolio. First, the managed care provider lowered its 2023 adjusted earnings per share outlook to about $26.09 from at least $28.25. The reason behind the shortfall was higher-than-expected Medicare Advantage medical costs, driven by greater inpatient utilization and a further increase in outpatient surgery costs. Due to these higher expenses, Humana said it expects its fourth-quarter Adjusted Insurance segment benefit ratio (also known as medical cost ratio) to be 91.4%, which is well above management’s prior expectation of 89.5%. In addition, we were disappointed to see Humana say it expects growth in its Medicare Advantage plan to be 100,000 in 2024, representing an increase of 1.8% over 2023 levels. This year was expected to be a slower one for membership growth for the entire industry, but our thesis in Humana was anchored on its ability to grow much faster than the broader industry. Up until today, Humana management expected it would deliver another year of above-trend growth, but that changed with today’s announcement. In light of this, we must reconsider why we own the stock. Shortly before we first bought Humana in 2022, the company announced a similar shortfall to its Medicare Advantage growth. However, we thought it had the potential to turn itself around through the help of a $1 billion value creation plan, which allowed management to reinvest aggressively in its Medicare Advantage plan offering. Those cost cuts and subsequent investments paid off as the company was able to recharge its membership growth over the next two years. But that has changed this year. Humana blamed rising medical costs as the reason why it took a more balanced approach to pricing, resulting in a lower share of overall industry growth. We think it may be harder for Humana to find another $1 billion in costs to take out again. Due to the combination of higher costs with slowing membership growth, the thesis to own Humana has changed and we must change with it — even if it means selling the rest of our stock into this morning’s decline. This will result in a loss of roughly 14% on our last remaining shares. The stock’s cheap valuation is not enough reason to continue holding onto Humana when your original investment thesis is broken. Additionally, this sale will pad our cash position a little further to protect against the possibility of more market downside, especially if the expectation for an interest rate cut in March comes down. We’ll look to redeploy these funds into other healthcare names. Last Friday we added four new names to our bullpen . (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) 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.
We’re exiting position in this healthcare stock thesis no longer holds
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