RSS feedAnd, another health care provider. I don’t know why these insurers are all popping up on my radar these days. But, who am I say to say no to beautiful charts, solid cash flow, and P/E ratios so reasonable? Today’s trading finishes my planned reallocation within Portfolio A, at least for the time being. As I mentioned, I do plan to use my smallest lot (about 20% of the portfolio) as a short-term trading lot so you will likely see a bit more action on the Curious Investments front over the coming months. Definitely more compared to the summer.
Today, Piper Jaffray breached back below the $55 mark and I stopped out. Content to recoup some of my losses, but booking an 18% loss on the stock since April. Not my proudest moment, but many lessons learned. Stay true to your stop losses. Don’t buy companies you don’t know ahead of earnings you’re unaware of. Don’t buy technical breakouts based on clearly speculation - i.e. a takeover. So, onto the stock pick I’m sure you’re all interested in.
Humana popped up on my radar today as I was screening for potential breakout candidates. Basically, a minimum of 3-months of consolidation with a 10-20% pullback (depending on how long the “base” is) and a price movement on above average volume. Humana has these qualities in spades. The stock has been essentially break even on the trailing twelve months, though it has been on fire of late. More importantly, we saw a moving average squeeze between May and August which set us up for the big push here in September culminating in what I think is today’s breakout. Normally, I’d wait for a pull back, but the combination of unbroken up days, a new RSI high, and MACD lines divering upwards gave me confidence in buying today.
For those wondering how exactly the 1-year chart shows a base, take a look at the 3-year price chart. This is the chart which really got me going. A trend line over the 3-years connecting higher-lows shows a long-term continuum (to steal a word from fellow blogger, David Gordon) as well as an intermediate/long-term base in the past year.
Enough of this hocus-pocus with charts. What about the valuation? A 20 P/E for a health insurance provider representing value? No way! Au contraire. While a P/E of 20 is above the industry average, Humana sports a PEG of .86. With a marketcap of $12B it’s definitely not a small cap pick, yet it sports growth characteristics which leave other behemoths - CI, UNH, and AET - in the dust. Revenue growth sits 19%, net income has grown 51% and 10% in 2007 and 2006 respectively, and return on equity sits at 20%. The company has legitimate cash on hand and sports a price to free cash flow of 5.96. For perspective, CI, UNH, and AET all sport P/FCF ratios greater than 10. One concern may be that Humana’s gross margins remain lower than industry average, but this could be taken as an advantage given that management has room to grow earnings not only through revenue growth but also through margin expansion.
Color me impressed. If you ask me, fundamentals on HUM seem to support a relatively higher P/E and Price-to-book ratio. Upon doing this quick research, I couldn’t help but buy in today with a full allocation. While all trades I make are with a 3-month to 6-month initial time window, I wouldn’t be surprised if you see me holding this one longer. Next step, more qualitative research. Given that I own two health insurance providers across my portfolios, I should get to know the industry a bit better and take a look at the strategies each company’s management are using to add value to the firm.
October 1st, 2007 at 3:30 pm
The HUM chart is a pretty one, and the company certainly is firing on all cylinders right now. As I said before, the PE and PEG might be a little high, but I think the stock should continue to do well.