Humana Inc (HUM): Are Hedge Funds Right About This Stock?

Many investors, including Carl Icahn or Stan Druckenmiller, have been saying for a while now that the current market is overvalued due to a low interest rate environment that leads to companies swapping their equity for debt and focusing mostly on short-term performance such as beating the quarterly earnings estimates.

 In this article we will find out how hedge fund sentiment to Humana Inc (NYSE:HUM) changed recently.

Humana Inc (NYSE:HUM) investors should pay attention to an increase in activity from the world’s largest hedge funds in recent months. At the end of this article we will also compare HUM to other stocks, including Canadian Imperial Bank of Commerce (USA) (NYSE:CM), PG&E Corporation (NYSE:PCG), and Nokia Corporation (ADR) (NYSE:NOK) to get a better sense of its popularity.

In the financial world there are many signals market participants can use to assess publicly traded companies. Two of the most under-the-radar signals are hedge fund and insider trading moves. Our researchers have shown that, historically, those who follow the top picks of the best money managers can outpace the S&P 500 by a solid margin (see the details here).

Last year, Aetna agreed to acquire Humana in a move that is expected to consolidate the healthcare plans industry. One of the funds that was betting on the merger is billionaire Larry Robbins’ Glenview Capital, which discussed the transaction in its third-quarter letter to investors. Read on to see Glenview’s comments:

“In managed care, we were pleased, if not elated, to see two transactions announced amongst our four portfolio holdings that are each significantly value-creating for both buyer and seller and came at meaningful premiums. In acquiring Humana, Aetna is purchasing a stronger growth business with greater organic growth (>10% top-line) in a transaction we believe will be mid-teens accretive to earnings per share in the near-term and greater than 20% accretive in the out years following synergies from each PBM operation. In acquiring Cigna, Anthem will achieve greater than 20% accretion in the near-term and as much as 30% accretion when the full PBM savings are captured late this decade. We have done extensive anti-trust analysis on each situation, and believe the odds of a completed deal between Aetna and Humana are exceedingly high, while a combination between Anthem and Cigna is highly likely to close as well. Despite our views, each arb spread is trading at 27% and 33% respectively, and each acquirer has seen their shares decline on average 16% despite the 15-30% accretion from the deal. In retrospect, we attribute this share price weakness to the following factors:

1. Risk aversion from traditional arb and event funds who have had very challenging conditions over the past 18 months, several of whom have liquidated;

2. Time arbitrage, with the deals unable to close in calendar 2015, causing investors to feel they may sell today and come back another day;

3. Concerns regarding the statements of political candidates during the election cycle that express populist concerns regarding the potential for market power coming from such consolidation; and

4. Fear that they are heavily owned by hedge funds, including Glenview, who have had poor performance, and as such that those funds will be forced sellers and create better buying opportunities later.

Looking forward in managed care, we own four names, Aetna, Anthem, Cigna and Humana. As mentioned Aetna has announced the acquisition of Humana and Anthem has done the same for Cigna. We have strong conviction in these names even without the mergers going through and view the mergers as adding a compelling asymmetric upside to the names. Take for example the Anthem and Cigna deal (illustratively, Aetna and Humana are in a similar situation). Anthem is trading at 11x 2017 standalone EPS (and <10x including the stand-alone earnings opportunity from its PBM). Cigna is trading at ~12x 2017 standalone EPS. Each company has projected a standalone EPS CAGR of 13-14% from 2015-2018. Should this transaction fail to receive anti-trust approval, we see 20-35% annualized returns in the names through the end of 2016. However, we do believe this transaction is highly likely to receive approval (we will discuss our anti-trust views of each transaction in further detail at our Investor Day on November 12th). Pro forma for the transaction, Anthem is trading at under 10x 2017 EPS, and should grow high-teens from 2017-2019 as the full accretion for the deal comes in. In this event we think Anthem’s stock could return almost 50% annualized return by year end 2016. Further, we think Cigna could achieve 50-70% annualized returns between now and deal closing.”

Keeping this in mind, let’s check out the latest action regarding Humana Inc (NYSE:HUM).

Hedge fund activity in Humana Inc (NYSE:HUM)

At the end of the fourth quarter, a total of 58 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of 4% from one quarter earlier. With the smart money’s sentiment swirling, there exists a select group of notable hedge fund managers who were upping their holdings substantially (or already accumulated large positions).

According to Insider Monkey’s hedge fund database, Larry Robbins’s Glenview Capital has the number one position in Humana Inc (NYSE:HUM), worth close to $1.47 billion, amounting to 8.3% of its total 13F portfolio. The second largest stake is held by Viking Global, managed by Andreas Halvorsen, which holds a $773.3 million position; the fund has 2.9% of its 13F portfolio invested in the stock. Remaining peers that are bullish consist of Nick Niell’s Arrowgrass Capital Partners, D. E. Shaw’s D E Shaw and Matthew Halbower’s Pentwater Capital Management.

As aggregate interest increased, key money managers were breaking ground themselves. OZ Management, managed by Daniel S. Och, initiated the biggest position in Humana Inc (NYSE:HUM). OZ Management had $258 million invested in the company at the end of the quarter. James Dinan’s York Capital Management also made a $114.2 million investment in the stock during the quarter. The other funds with new positions in the stock are Michael A. Price and Amos Meron’s Empyrean Capital Partners, Richard Barrera’s Roystone Capital Partners, and Eric Mindich’s Eton Park Capital.

Let’s check out hedge fund activity in other stocks similar to Humana Inc (NYSE:HUM). These stocks are Canadian Imperial Bank of Commerce (USA) (NYSE:CM), PG&E Corporation (NYSE:PCG), Nokia Corporation (ADR) (NYSE:NOK), and Kellogg Company (NYSE:K). This group of stocks’ market caps match HUM’s market cap.

As you can see these stocks had an average of 20 hedge funds with bullish positions and the average amount invested in these stocks was $535 million, considerably lower than the $5.89 billion in HUM’s case. Nokia Corporation (ADR) (NYSE:NOK) is the most popular stock in this table, while Canadian Imperial Bank of Commerce (USA) (NYSE:CM) is the least popular one with only 14 bullish hedge fund positions. Compared to these stocks Humana Inc (NYSE:HUM) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.