We’re buying the dip in a health insurance stock that jumped in 2022

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We’re buying 10 shares of Humana (HUM) at roughly $492 apiece. Following Tuesday’s trade, Jim Cramer’s Charitable Trust will own 110 shares of HUM, increasing its weighting in the portfolio to 1.96% from 1.78%. We are putting some of our approximately 10% cash position to work Tuesday afternoon, looking for buying opportunities in stocks of profitable companies with dependable earnings power that trade at reasonable valuations. Humana is our choice. Even with a nearly 4% decline Tuesday, shares were up more than 5% in the past 12 months. This criterion brought us to managed care, a reliable group that is getting hit hard in Tuesday’s selloff. Wall Street turned on the industry in the morning. Cigna (CI) was downgraded to equal weight, equivalent to a hold rating, at Wells Fargo. CVS Health (CVS) was downgraded to in-line, or hold, by Evercore ISI. The analysts’ action is bringing down shares of all the operators Tuesday. However, the pullback in Humana represents an opportunity, and we’re buying back half of the shares we trimmed slightly above $500 in early October . Here’s why. Part of the thesis for the CVS downgraded was increased competition in the Medicare Advantage (MA) space. A lot of that is coming from the revamped offering by Humana, which Evercore sees as a market share gainer. Humana gaining share in MA has been part of our bullish thesis for months, so we view Evercore’s call as confirmation. It’s also consistent with what Humana disclosed in December when it announced that “based on annual enrollment period activity to date,” it was increasing guidance for MA growth from 325,000 to 400,000 members to “at least 500,000″ members. This was big news because the revised guidance represents net membership growth of at least 10.9%, which puts the company back on track toward growth above the industry rate. In the Wells Fargo note, the analyst believes Cigna has limited opportunities for price-to-earnings multiple expansion this year after a strong 2022. But it was noted that Humana is a name to favor in the group. According to Factset, Cigna is expected to grow earnings by about 7% year over year in 2023, compared to Humana’s estimate of 11.7%. Humana trades at a higher multiple of about 17.5x those 2023 estimates. But it’s worthy of that premium due to its consistent double-digit earnings growth rate that is insensitive to shifts in the economy and interest rates. (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.

Traders on the floor of the New York Stock Exchange (NYSE) in New York, on Tuesday, Jan. 3, 2023.

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