Humana’s stock dived when it announced a sharp decline in memberships for the top-rated Medicare Advantage (MA) plan. There are serious concerns among investors that the company may not be as attractive an income investment play as it used to be.
Humana earns revenue through healthcare services and health insurance. Originally just a company with nursing home operations, Humana has expanded into managed care and health plan services, particularly for Medicare Advantage beneficiaries. Apart from offering its services to individuals, the company also targets employers and government programs like Medicare and Medicaid.
This model has worked well for the company in the past, giving it a dominant position in the industry. However, the company’s star rating for the H5216 plan has fallen from 4.5 stars to 3.5 stars. As a result, enrollment in its plans rated 4 stars or higher has plummeted by 94%!
Why are we bearish on the stock?
The significant reduction in enrollments is the basis of our bear thesis on the company, but it isn’t all that is wrong with the firm. It also faces significantly higher costs on its Medicare Advantage plans as a result of increased expenses.
These expenses are rising because more and more people are utilizing inpatient and outpatient services. These increased costs and the enrollment reduction will negatively impact 2025 and 2026 revenues. That’s because in the short term, Humana will need to adjust its premiums to deal with the increasing costs. Seniors and brokers won’t perceive this positively, generating negativity around the company’s brand.
When open enrollment season comes around, citizens will be conscious of this, resulting in them preferring other offers on the market. While the lower star rating doesn’t impact the business’ next year’s results, it will hugely impact revenues after that.
What are analysts saying?
The average upside as per analysts stands at $390, well over 70% from here. The stock also has a healthy dividend yield of 1.27%. However, as the market absorbs the hit to future revenues, analysts will adjust their price targets.
Bank of America has already downgraded the stock to underperform as a result of the new star ratings. The company’s margins are already under pressure due to rising costs and if enrollments go down, the company’s margin recovery will take even longer.
BoA has reduced its 2026 EPS estimates by half, from $25 to $13. Income investors will realize that the dividend isn’t safe anymore, resulting in them fleeing the stock over the course of the next year. No matter which way one looks at the stock, it will take years before the company can get back on track, making the stock a strong sell at the moment.
Humana isn’t on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 71 hedge fund portfolios held HUM at the end of the second quarter which was 74 in the previous quarter. While we acknowledge the risks associated with HUM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HUM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.