Humana (HUM): Deep Value or Classic Value Trap?

$Humana(HUM)$

Humana (NYSE: HUM) has been crushed. The stock dropped another ~7.2% today and now trades around $230—roughly 50% off its all-time highs. For long-term investors, this kind of drawdown presents an intriguing puzzle: is this the moment to start accumulating shares in a quality company undergoing a temporary reset? Or is Humana a classic value trap with much further to fall?

I’ve been watching this story unfold closely for months, and in this article, I’ll break down the current situation, the structural risks, the valuation reset, and the indicators I’m watching before deciding to step in.

The Setup: What’s Behind Humana’s Massive Decline?

At a high level, Humana’s business is built around Medicare Advantage, a private alternative to traditional Medicare. The model has historically been profitable, especially when insurers qualify for bonus payments from the government. These bonuses are based on Star Ratings assigned by the Centers for Medicare & Medicaid Services (CMS). Plans rated 4 or 5 stars receive extra funding and increased enrollment opportunities.

This year, several of Humana’s plans were downgraded below 4 stars, which is a big problem. It means the company will no longer receive performance bonuses on those plans—a direct hit to revenue and profitability for at least the next couple of years. Humana is currently challenging the rating changes, reportedly pursuing legal action, but that process is uncertain and will take time.

Anecdotal Red Flags

Beyond the ratings cut, there are troubling signs emerging from the provider side of the equation. Based on comments I’ve seen from doctors and industry insiders, Humana may have become overly aggressive in cost control, leading to denied claims, delayed approvals, and overall provider frustration.

In some cases, this has led providers to drop Humana altogether—a rare but serious issue. For patients, if their doctor no longer accepts Humana, they’re likely to switch insurers. That’s a potential long-term brand and retention problem, not just a one-time financial hit.

Can We Rely on Historical Data to Forecast the Future?

Normally, I use historical earnings trends to estimate future earnings potential. But in Humana’s case, the nature of the decline feels different—more like a structural earnings reset than a standard cyclical dip.

That doesn’t mean the past is irrelevant. On the contrary, it gives us important context:

• From 2012 through 2022, Humana grew EPS at a 15–20% compound annual rate.

• Even factoring in the recent drawdown, analysts (via FAST Graphs) estimate a long-term growth rate around 11%.

So if and when the business stabilizes, it’s likely capable of returning to double-digit earnings growth. But that’s only helpful after earnings bottom. And right now, we simply don’t know where that floor will be.

Valuation: Is the Stock Cheap Enough?

Let’s talk numbers. I’ve run my own intrinsic value models, and based on what I call the “recession buy price,” Humana’s value sits around $260. With the stock currently trading around $230, we’re now below that threshold.

That suggests a potentially attractive margin of safety. If the business can recover to prior peak earnings levels ($26/share), and eventually grow from there, we’re looking at 100%+ upside over the next 5–7 years. But there are important caveats:

• Earnings may still fall significantly further.

• It could take years to recover to peak profitability.

• In the meantime, sentiment is toxic.

So while valuation is compelling on paper, the real opportunity will emerge when we have confirmation that the business—and sentiment—has turned the corner.

Why I’m Using Momentum as a Trigger

To protect capital, I’m combining valuation with technical and momentum indicators. Here’s how I approach this type of setup:

1. Quant Momentum Ratings Seeking Alpha’s quant system rates Humana’s momentum a D+, and after today’s decline, it’s likely to be downgraded to F. This rating tends to lag actual price action by a few days, so I expect it to worsen before it improves.

2. Technical Price Levels I’m closely watching the 50-week simple moving average, currently around $370. This moving average adjusts faster than the 200-day, and better captures long-term turning points in battered stocks.

   The setup I’m waiting for is this:

   Stock clearly bottoms (a confirmed low).

   Stock breaks above the 50-week SMA, wherever that level may be at the time.

   This typically coincides with improving sentiment and visibility.

This strategy doesn't guarantee you buy the exact bottom—but it dramatically reduces the risk of buying into a falling knife.

The Adidas Analogy: Sometimes Resets Pay Off

One recent example that feels similar is Adidas. I bought it near the lows in 2023, after the Yeezy shoe debacle with Kanye West. Sentiment was horrible. Sales were down. The brand had taken a PR hit.

But I knew the business wasn’t structurally broken—it just needed time to clean up and reset. And it did. Since then, Adidas has rebounded ~80%, even though earnings haven’t fully recovered.

The key takeaway: You don’t need a full earnings recovery to generate strong returns—just a reset and a path back to growth.

Why Humana Isn’t a Terminal Decline Story

Some investors compare Humana to other fallen stocks like Estee Lauder, Nike, or Advance Auto Parts, where competitive erosion is more permanent. But I see Humana more like Adidas—a good business that overreached, got hit hard, and now needs to reset and rebuild.

Here’s why:

• Humana isn’t losing customers to a disruptive new player.

• Its core Medicare Advantage business is still a powerful profit engine—once bonuses return.

• There’s a clear fix: improve service, restore provider relationships, and earn back trust.

And with the stock down over 50%, don’t be surprised if activist investors start circling. Management’s decisions are under a microscope now.

The Bigger Picture: Earnings Pressure Has Shifted

In 2023, the pressure on Humana was to grow EPS from $26 to $28–30. That kind of pressure leads to short-term cost cutting and aggressive accounting.

In 2025, the pressure is different. Now it’s about survival and stabilization. Even if Humana earns just $15–16 per share, but shows signs of growth from there, the market will reward that trajectory.

This change in pressure often leads to smarter long-term decisions. And from an investor’s point of view, the risk/reward shifts dramatically when expectations are reset.

Conclusion: Should You Buy Now?

Humana is deeply discounted and likely undervalued based on normalized earnings. But buying now still carries significant risk because:

• We don’t know if earnings have bottomed.

• Momentum is still negative.

• Visibility is poor for 2025–26.

So here’s how I’m handling it:

• I’m not buying yet, but tracking it closely.

• I’m waiting for momentum to turn, using tools like Seeking Alpha quant scores and the 50-week SMA.

• Once the stock bottoms and starts to recover, I’ll be ready to move—especially if valuation still looks attractive.

Until then, I’m staying patient.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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