Is Humana Well Enough Now to Get Back in the Stock?
As unrealistic as Medicare for All is, health care stocks, especially insurers, got hammered by the very idea. Humana gave back almost 20% from this. Is it on the way back now?
Humana was a delightful stock from the fall of 2016 until the fall of 2018, where it more than doubled in value over this two-year period. That’s a 50% return per year, impressive enough to even make a lot of tech investors with their bigger appetites for returns pretty happy.
Then the fall of 2018 happened, which brought down the level of the stock market ocean pretty considerably and took the great majority of stocks with it. Humana had been pretty hot to say the least, but still fell into the grips of this wave and gave back 19%, on par with what the market pulled back by during this time.
The way to avoid the pain of market reversals is to just get out of stocks during this time, or perhaps invest in stocks that just don’t track the market all that closely like utility stocks. People grossly underestimate the power of the market and grossly overestimate how important a company’s business is to its stock price, and the fact that we’d like to hold something for years doesn’t mean that we would not be better off stepping aside at times, and look to be in our stocks during the good times more and out during the bad.
The new year brought more promise to stocks though, especially when the Fed told us in December that they were going to lay off for a while. Less than 3 months earlier, they startled the market by saying that they felt that more interest rate hikes would be needed, and the period in between consisted of a mini-bear market where we gave back the 20% from fear of interest rates going up.
If anyone was wondering about how important the Fed’s mood was to the stock market, they need to look no further than this example, although there’s a lot more where that came from. In spite of how obvious this all should be, there are many who somehow don’t understand that there are many big factors that come into play apart from how the company’s business is doing.
Some of those people are looking at Humana now and thinking that it may be time to get bullish on it again. The dream of Medicare for All should never have been taken seriously by anyone, but it did affect health care stocks quite a bit. Humana was in the midst of getting back what it lost during the stock market tumble, and then all this talk hit the street, and this sent this and other stocks in the sector tumbling once again.
We often sell off stocks too much, and that happens all the time on a lot of different time scales, and this is something that astute investors and traders can look to take advantage of. Humana does look very much like this was just the case, even though the end of private health care would spell doom for the company as it would simply put them out of business.
The effects of potential bad news are supposed to be priced in to stock prices as matters of probability, and given that the probability of Medicare for All is extremely low, the effects upon Humana’s stock price should also have been extremely low. Stock traders are not always rational though, and are particularly driven by emotion, so it’s giving up 25% from February to April and falling well below its 2018 lows isn’t really that big of a surprise.
This is what we call oversold, and oversold means an overreaction that should at some point be corrected. Just because we think a correction might be coming at some point doesn’t mean that we should bet money on this right now though, as we at least need to wait to see the move start before we want to be too daring with these entries.
The Market Will Decide When Humana is Ready to Rise Up Again
Moves on the chart are what we want to be looking at here, confirmed moves that is, not things like the stock is trading 25% below its historical multiple because we can say that about any stock that has dropped like this regardless of the circumstances. This tells us nothing really, other than perhaps there is room to grow once a stock starts being viewed more positively by the market. Stocks don’t move up or down by themselves, they move from people either wanting to pay more or less for it, so what people are willing to do not only matters but is central to the matter.
This is not to say that we just want to ignore a company’s situation, and such things often do inspire investors to pay more or less, but our focusing on this exclusively just doesn’t make any sense. If we really want to assess potential factors that may influence price, we need to look at how the company is doing, how the sector is doing, market trends, economic projections, how we may react to them, what the Fed is thinking, the trade war with China, and all sorts of other factors that may weigh in on our predictions.
We never can be sure how a stock will move but what we can decide with sufficient confidence is what the direction of the current trend is. Neither trading nor investing is as much about the future as it is the now, viewing what is going on now and deciding what the best course of action is now. Tomorrow will come soon enough, and when it does, we’ll have to decide again by accounting for any new information since.
Even traders, who focus a lot more on the now than investors do, can mess this up pretty easily, We so often try to project our ideas upon the market rather than watching where it is headed, and if the two views collide, we should never stubbornly prefer to persist with a view after it has been shown to be wrong.
When Humana Gets Well Again, We Will See Them Get Out of Bed First
Humana continues to do great as a company, and if this is what you were using to decide, you’d be in the whole while, through the dip that Chairman Powell caused back in October, as well as in the face of Sen. Sanders’ health care fantasies earlier in the year.
However, this simply isn’t a good guide if we’re looking to invest in a way that even resembles good investing, and it’s because there’s all these other things that affect a stock’s price that also need to be accounted for. Humana does look good fundamentally in the near term though. Their projected earnings for 2019 look very nice and their business is moving ahead very well.
If this were not the case, this could be used in an exclusionary manner, and there are all sorts of stocks whose business prospects are going the wrong way and those are companies we want to be more careful with if we are trading them on the long side, and just plain stay away from if you are an investor, because people do care enough about these things that this can remain a millstone around a stock’s neck even during strong bull markets. Even if they do move your way, you could have been in something else that did better, and that should always be sought.
The key to Humana looking more bullish now is the fact that it has been driven down too far by what amounts to paranoia, but even that needs to be confirmed by charts, the evidence that we have gotten over this and our minds are clearing enough.
Humana has been bouncing up and down quite a bit over the last couple of months, and those who have been anticipating a comeback have just been teased so far. It’s breaking out of this range though on Friday does bode better for a recovery though, and there is still $50 between where it is now and where it was last February, representing a potential gain of almost 20%.
For those who are willing to give this stock some room and look to ride it back up without being shaken out by the noise, they may perceive that the downside of this play is about half what the upside is, if we keep it to the point where it breaks below the range it stopped going down at during its June attempts, which is about $27 lower.
This is too much room to give it though under these circumstances. If we’re trading this breakout, which is worth a look right now, it won’t take it going down anywhere near $27 to tell us that this breakout move has failed.
The trick is to get out when it no longer looks like a buy within whatever criteria we choose to decide these things, and while it does look like a buy now, if this ends up breaking down, it won’t take any near this much to turn the odds against us with this current move anyway, at the point where we would not enter due to the move not having enough promise and looking like it’s stuck in the mud or worse.
If this move doesn’t work, perhaps we will have another look later, but we will need even more evidence to want to enter it given that the evidence with the last move wasn’t strong enough. Even if we are hoping to be in our next stock until decades from now when we retire, this should never be about hope or simply blindly entering a position with no regard to the timing of it.
Getting in at the right or wrong time will always matter, next year or in 40 years from now, and this is a good lesson that most investors need to learn, save for the few that actually pay attention to timing their entries properly. We should at a minimum expect that this should be a good time to enter a stock to do it, otherwise it’s better to wait, because our eagerness can have us investing with a negative probability, which is always a foolish idea.
Humana does look pretty good here, not so much for the reasons that the fundamental analysts are telling us, but mostly because it moved down far more than was reasonable and it has now shown us that the market may be prepared to mend its ways. We’ll have to see how much mending actually goes on though, and this story is only told by charts. What is right today may be wrong tomorrow, but to be able to tell, this does require that we dare to watch.
Editor, MarketReview.com
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