A Managed Care Stock That’s Getting Noticed

08/19/2009 10:05 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Research says giant managed-care provider Humana has gotten a lot of bullish attention, but questions whether it’s justified.

A recent article in Barrons.com, “Don’t Fear This Managed Care Stock” (August 3rd), takes an optimistic look at the shares of Humana (NYSE: HUM), following the company's stronger-than-expected earnings report. The company has had its share of bad news, including the loss of a major military contract.

In addition, the Obama Administration has targeted Medicare Advantage, which Humana relies on for more than half its earnings, for cuts. Nonetheless, the author contends the stock is "well positioned to deal with the fallout from health-care reform."

The Barrons.com article acknowledges that there is uncertainty in almost every business associated with health care, and particularly among managed care companies. However, the company recently proved in the second quarter that "it has been positioning itself to deal with the fallout from health care reform and other structural changes to the industry." Humana has increased its cash position in recent months, growing it to $665.8 million from $250.5 million at the end of 2008. The company added to its liquidity by paying off a $250-million credit line and collecting dividends from its subsidiaries.

Technically speaking, the shares of HUM are struggling to overcome the doldrums. The stock is down more than 9% since the start of 2009, lagging behind the broad market. In fact, the equity is hitting resistance at the $34 level—an area that has capped the shares since they gapped lower on February 23, 2009.

Furthermore, HUM is currently struggling to overcome resistance at its declining 50-day exponential moving average.

Meanwhile, options players are skeptical of the shares, as the stock's Schaeffer's put/call open interest ratio [recently rested] at 0.72, which is higher than 85% of all those taken during the past 12 months. In other words, short-term options speculators have been more skeptical of the shares only 15% of the time during the past year.

What's more, short sellers are adding to their bearish bets as the number of HUM shares sold short increased by nearly 5% over the last month to roughly six million shares. This accumulation of bearish bets accounts for 3.5% of the company's total float.

Until the stock finally breaks through staunch resistance at the 34 level, the stock is likely to remain in its sideways channel and is in danger of breaking down under trend line resistance. (It closed Tuesday at $35, just above its 50- and 200-day moving averages—Editor.)

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