If there could be a health insurance superstore, it would probably be UnitedHealth Group Inc (NYSE:UNH). Through both organic operations and acquisitions, it now has a stronghold on many aspects of health insurance and associated businesses throughout the country.
Most people think of UNH stock as simply being a health insurance provider. That’s a mistake. UNH provides consumer health benefit plans and services for virtually every segment: national employers, public sector employers, mid-sized employers, small businesses, individuals, and military. It offers coverage but also well-being services to older individuals, keeping up with their preventive, chronic, and acute concerns. There’s a network of over a million doctors and some 6,000 hospitals and other facilities in its plans.
OptumHealth was purchased by UNH stock some time ago. It provides health management services as well as health financial services. This segment serves individuals through programs offered by employers, payers, government entities, and directly with the care delivery systems.
OptumInsight provides the support logistics needed for such a massive program — software and business process outsourcing for not just hospitals, but also doctors, health plans, governments, and life sciences companies. Some of you may be covered by its OptumRx segment i.e. pharmacy care services.
UNH Is All-In-One
So, yeah, pretty much everything is in one place with UNH. However, there are a few holes, and that’s why UNH bought its medical group division of DaVita HealthCare Partners (NYSE:DVA), a specialty health company that deals in all forms of dialysis care. However, the purchase price was almost $5 billion for a division that generated about $80 million in operating income. UNH has way overpaid for this unit.
UNH stock was a big recipient of Obamacare’s mandate. With the mandate going away, and small businesses now being permitted to join together into association health plans, a good deal of UNH’s bread and butter may get terminated. In addition, because of the limitation that insurance companies cannot compete across state lines, UNH and many of its peers have monopoly or oligopoly pricing power in many jurisdictions, which may also soon go away.
Since Obamacare began, UnitedHealth Group stock has risen six-fold. That’s not likely to continue.
UNH Stock Has Pros and Cons
So there are crosscurrents in the healthcare market, to be sure. There are pros and cons with UNH stock these days, and what you do with UNH stock really depends at this point on your position and risk profile.
If you own UNH stock and have a gain, you may want to consider setting stop losses at varying intervals — perhaps something that triggers a sell of 20% of your position on every 10% decline. That way, if UNH stock craters by 50%, you’ll only absorb a 25% loss. Or you can vary that core concept as you choose.
If you don’t own United HealthCare stock and are considering buying it, it feels a bit expensive. But not outrageously so. With five-year annualized earnings growth of 15%, it falls into my category of “growth stock.” As such, I am willing to pay a price/earnings-to-growth ratio of 1.5 to 2.0. With Fiscal Year 2018 earnings pegged at $11.84 per share, and a stock price of $238, it trades at just about 20x earnings, or a PEG ratio of 1.33.
So if you buy, either average in over time and/or set stop losses 7 -12% below your purchase price.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. He is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. Meyers does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].