After the UNH Blowup, Should You Short Health Insurance Stocks?

Advertisement

UnitedHealth Group (UNH) surprised investors on Thursday with some bad news. Earnings would be reduced by $425 million because the Obamacare health insurance exchange product was performing poorly. In fact, it was so poor that UNH is considering pulling out of the exchanges altogether.

After the UNH Blowup, Should You Short Health Insurance Stocks?UNH stock fell about 5% on the news.

The problem UNH is grappling with is what critics of Obamacare have warned about since the beginning. Because individuals cannot be excluded for pre-exisiting conditions, those with chronic illnesses were able to obtain insurance. Claim payments on those chronic illnesses are obviously exceeding premium payments.

If Unitedhealth group can’t make money on the exchanges, can anyone? There’s the rock and the hard place — making it affordable enough for people to join, yet expensive enough so the company can profit.

I’m dubious. A number of smaller co-ops have already shut down.

That leads to the question of if Obamacare will end in what many have predicted: A death spiral. That’s where more and more insurers exit the exchanges. For those operating in small states or just a few states, it will require what those same pundits have predicted — a government bailout.

One wonders how this profit issue got past the actuaries at UNH, but regardless, this is causing ripples in the health insurance industry. Although UNH stock stabilized on Friday, is it a harbinger that short-sellers might want to pay attention to? Should health insurance companies of all ilks be shorted?

Not so fast.

The key question for any given stock is whether the company is diversified or not, like Unitedhealth is. Take Molina Healthcare (MOH), which reported great results on Thursday because it has been going after the dual eligible and Medicaid markets. It also scores government contracts. It says that its 225,000 Obamacare enrollees is a profitable segment.

Aetna (AET) is a different case. It said it expects to meet its full year operating earnings target, but it is bailing on several state exchanges, which were not profitable, and plans to raise premiums by “low-double-digits” in 2016. So AET sees being able to make inroads, and given that virtually every plan is price competitive, we go back to the issue of pricing vs. enrollment.

Anthem (ANTM) also reaffirmed guidance and its commitment to the exchanges.

So as far as shorting health insurance companies goes, I wouldn’t rush to make that trade. As for UNH stock itself, that’s worth examining. UNH has a pretty diversified business. It has managed care solutions for state Medicaid programs, sporting 5 million enrollees. It has a huge corporate market for both private and government employees. It has a retirement segment, as well as providing healthcare for three million of our servicemen. It also has a huge presence in Brazil and four million people globally.

This doesn’t even mention its Optum subsidiary, which handles all the management and tech services. So Obamacare is not the be-all and end-all.

Financially, UNH stock sports almost $10 billion in cash and short term investments. More importantly, it is a free cash flow monster, generating $6.5 billion of it last year and $7.1 billion in the TTM.

I have a slight problem with valuation. UNH stock trades at 18 times FY15 estimates and about 16 times FY16 estimates. Analysts project long-term earnings plus dividend growth at 13.6%. So it isn’t outrageously overvalued here.

I think the safer play is to buy an ETF like the iShares US Healthcare Providers (IHF).

As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/11/unh-stock-unitedhealth-group-health-insurance-companies/.

©2024 InvestorPlace Media, LLC