Today, let's take the next step with UnitedHealth (UNH)...
If you've been following along, you'll recall that I took a first look at the struggling health care giant in Friday's e-mail. As I concluded:
UnitedHealth has shown strong growth... profits and cash generation... low [capital expenditures]... high [free cash flow ("FCF")]... and lots of capital returned to shareholders.
As for valuation, today it has a market cap of about $279 billion and an enterprise value of $339 billion – this is a huge company! Analysts expect UnitedHealth to earn $22.28 per share this year, so at $307.20 per share, the stock is trading at a mere 13.8 times earnings. That's far below the S&P 500 Index.
Why have investors turned so sour on the company? And is the sell-off overdone, which would present us with a mouth-watering buying opportunity?
Today, let's take a stab at answering those questions...
1) Let's start by highlighting the issues that have crushed the stock.
As I showed in Friday's e-mail, it's not (at least so far) collapsing financials.
Rather, it's investigations into its practices that investors fear will turn into big fines and lower profits going forward.
First, the Department of Justice last month announced an investigation into UnitedHealth over possible Medicare fraud.
Here are more details in this Wall Street Journal article from mid-May: UnitedHealth Group Is Under Criminal Investigation for Possible Medicare Fraud. Excerpt:
The healthcare-fraud unit of the Justice Department's criminal division is overseeing the investigation, the people said, and it has been an active probe since at least last summer.
While the exact nature of the potential criminal allegations against UnitedHealth is unclear, the people said the federal investigation is focusing on the company's Medicare Advantage business practices.
And as the article continues, the investigation is the latest in a string of government inquiries into UnitedHealth:
The criminal probe adds to a list of government inquiries into the company, including investigations of potential antitrust violations and a civil investigation of its Medicare billing practices, including at its doctors offices, that the Wall Street Journal first reported in February.
UnitedHealth is seeking to recover from a meltdown of its stock over its financial performance and the sudden replacement this week of its chief executive officer, Andrew Witty, with its chairman and former CEO, Stephen Hemsley.
2) Then, on May 21, the Guardian in the U.K. reported on more problems for UnitedHealth: Revealed: UnitedHealth secretly paid nursing homes to reduce hospital transfers. Excerpt:
UnitedHealth Group, the nation's largest healthcare conglomerate, has secretly paid nursing homes thousands in bonuses to help slash hospital transfers for ailing residents – part of a series of cost-cutting tactics that has saved the company millions, but at times risked residents' health, a Guardian investigation has found.
Those secret bonuses have been paid out as part of a UnitedHealth program that stations the company's own medical teams in nursing homes and pushes them to cut care expenses for residents covered by the insurance giant.
In several cases identified by the Guardian, nursing home residents who needed immediate hospital care under the program failed to receive it, after interventions from UnitedHealth staffers. At least one lived with permanent brain damage following his delayed transfer, according to a confidential nursing home incident log, recordings and photo evidence.
"No one is truly investigating when a patient suffers harm. Absolutely no one," said one current UnitedHealth nurse practitioner who recently filed a congressional complaint about the nursing home program. "These incidents are hidden, downplayed and minimized. The sense is: 'Well, they're medically frail, and no one lives for ever.'"
The investigation appears to be quite thorough. Here's more from the article:
The Guardian's investigation is based on thousands of confidential corporate and patient records obtained through sources, public records requests and court files, interviews with more than 20 current and former UnitedHealth and nursing home employees, and two whistleblower declarations submitted to Congress this month through the non-profit legal group Whistleblower Aid.
The documents and sources provide a never-before-seen window into the company's successful effort to insert itself into the day-to-day operations of nearly 2,000 nursing homes in small towns and urban commercial strips across the nation – an approach which has helped UnitedHealth secure a vast stream of federal dollars from Medicare Advantage plans that cover more than 55,000 long-term nursing home residents.
A follow-up article by the Guardian two weeks ago reveals that lawmakers are responding to whistleblower claims: UnitedHealth faces federal scrutiny into whistleblower claims. Excerpt:
US lawmakers on both sides of the aisle are raising concerns and seeking investigations in the wake of Guardian reporting on whistleblower claims about practices within UnitedHealth Group's nursing home partnership programs.
One US senator has announced he is launching an investigation and two US representatives are now calling on the US Department of Justice to expand its reported investigations of the nation's largest healthcare conglomerate. Others said they are troubled by whistleblower allegations reported by the Guardian – including claims that UnitedHealth paid bonuses to nursing homes to help reduce residents' hospital transfers and used improper sales tactics to get nursing home residents to sign up for the company's Medicare Advantage plans.
To summarize these reports and investigations, UnitedHealth inflates its profits by illegal and/or unethical behavior on both revenues – overbilling the government – and expenses – denying care to patients.
3) Is there truth to this? Many of my readers seem to think so...
In response to my request for feedback in Friday's e-mail, a number of folks wrote to me with insights about UnitedHealth. And I wanted to share three today...
Dr. Jim S. said:
As a physician, I have a moral objection to the way UnitedHealth has made its money by ripping off patients, Medicare and Medicaid. They do this by holding up treatment approvals, forcing physicians to upcode, delaying treatment, etc.
Lloyd V. added:
I am a former healthcare executive with expertise in billing. I'm also a Medicare Advantage policy holder who has seen how United operates.
United contacts its Medicare Advantage customers and offers a free home visit. They are relentless in trying to get a foot in the door. After a physical exam the nurse writes up an assessment of the patient's health. Then a coding team pores through the record and codes every possible diagnosis and comorbidity, even if the patient is relatively healthy. These codes determine the intensity of care score that determines how much Medicare will pay United each month. The higher the intensity, the higher United's revenue, even if there is little or no care actually delivered.
Because the insurance company, the network of doctors and other providers, and the analytics entity are all owned by United, they have all the information needed to optimize their payment stream from Medicare.
They are also notorious for denying claims to keep their cost of care down. Their margin is carefully monitored, but since they start with an elevated intensity of care, the net result is a long record of "good management" as an insurer.
Lloyd sees a big fine and lower profits in the future:
Because this upcoding is somewhat subjective, it will be hard for the government to prove fraud. I would expect to see a very large settlement to resolve the overbilling. Given United's size, it likely won't cripple the company but future profits may be somewhat muted under oversight of coding and billing.
I should note that United is not the only Medicare Advantage contractor that follows these practices. However, they are the best at it, given their vast network and data.
Lastly, Stansberry Alliance member Bill B. said:
I expect UNH's free cash flow to deteriorate on a relative basis because it isn't just Main Street that is upset/angry with them. I've recently talked to two different major hospital chains and several doctors and their staffs. It is going to take far more than bragging about profits and free cash flow to turn around the negative perspective about UNH.
By the way, this WILL manifest itself in UNH losing some of the contracts it "railroaded" some large corporations into. Several are debating dropping the service or UNH giving up some profits for better coverage.
You may want to contact some major companies and sort this out (not sales people, but the CFO and heads of benefit programs). Don't forget the states, who tend to think the same as their voters – that UNH SUCKS from a benefits standpoint.
This is pretty damning. But the stock still might be a buy if it's cheap enough and the problems are fixable...
4) This recent Wall Street Journal article outlines how UnitedHealth can try to get things back on track – mainly by becoming more transparent: What UnitedHealth Can Do to Revive Its Battered Stock. Excerpt:
The largest healthcare insurer and provider in America, UnitedHealth is bigger by revenue than Apple or Exxon Mobil. But investors have limited visibility into what is actually driving UnitedHealth's profits – or where the risks lie.
That is partly because its businesses are deeply intertwined. Its insurance arm has vast dealings with its health-services businesses, creating a maze of internal transactions and blurred business lines.
As the article continues, this previously didn't seem to be as much of an issue when it came to the stock:
The opacity wasn't a problem for Wall Street as long as the company kept delivering. With a steady record of beating earnings estimates and a soaring stock, investors were content to let details slide.
This year, the magic vanished. In April, UnitedHealth missed its quarterly earnings estimates and slashed its 2025 forecast. In May, Chief Executive Officer Andrew Witty abruptly stepped down, and the company suspended its outlook. Days later, the Wall Street Journal reported on a Justice Department criminal probe into its Medicare practices.
"Sunlight is the great disinfectant," said George Hill, an analyst at Deutsche Bank. "If you have a lot of investor concerns around sources of profitability, transparency is a great way to address that."
5) A friend sent me a recent pitch for the stock by James Emanuel on Substack: UnitedHealth Group | A Healthcare Giant. Excerpt:
This is a defining moment for the company. In today's dislocated market, its undervalued stock offers investors a compelling entry point, just as one of the most strategically positioned players in U.S. healthcare begins to reignite its momentum.
6) Back on April 28, someone posting anonymously under the name buggs1815 pitched UNH shares as a buy on my favorite stock-idea website, Value Investors Club.
Only members can see the full ideas until 45 days after they're posted (the entire UNH pitch is here – which guests to the site can still see by submitting a valid e-mail address), so I'll share some excerpts below:
The Change Healthcare issue is mostly behind them and you can bet they learned something from the $3 billion (and counting) experience. I doubt any MCO is as locked down on cyber security as UNH after such a horrible attack. They also did right by the people who were suffering by extending credit and helping them through. This seems to have been the right thing to do, even though they didn't necessarily have to do it and it cost them in the near term.
The murder of Brian Thompson, CEO of UnitedHealth, was a true tragedy, but in the end was very bad luck caused by a crazy person. The company also learned some things about how it is perceived by the public and is able to take steps to address misperceptions where they exist.
With respect to reform/investigations: Congress doesn't even function right now. The idea that they are going to radically reform the healthcare system when there are many other easier and more pressing issues is laughable. If anything, a Republican Congress is more likely to lean on Medicare Advantage to try to further reduce Medicare spending. The reality is private enterprise has a much better chance of cutting costs in the system than the government does as they actually have strong incentives to do so. Investigations and audits are a perpetual part of this business, they are part of the normal course of business.
And as the pitch continues:
Finally, with respect to the great guide down of 2025. Health insurance is a short tail business. It is clear that UNH mispriced their Medicare Advantage plans this year. Plenty of peers have also made mistakes when modeling Medicare Advantage (e.g. HUM). The beauty of short-tail insurance is you can reprice next year and I expect UNH to correct its mistakes during the next enrollment season. I don't have some magic bullet to parse the data and explain why they got it wrong basis point by basis point. I think they probably have data scientists inside the company trying to do that. The company has been surprised before in the past (the last time they had a major miss was 2008), but it has always corrected course and that will be the case this time. Unlike long-tail lines where mispriced policies can cost you for years, UNH will have the opportunity to correct things in a few short months.
In the pitch, buggs1815 added:
AI should be a huge benefit to UNH. Their business involves lots of coding, payments, and manual administrative processes. UNH probably has the biggest and best healthcare dataset in the world. AI needs a huge amount of real data to train models, and UNH has it. Credible estimates for the cost savings to the system run in the hundreds of billions of dollars: https://www.nber.org/system/files/chapters/c14760/c14760.pdf So much of the insurance business involves administration, denying fraudulent claims, and looking for patterns, all things AI is very good at. I would be shocked if AI doesn't make UNH materially more efficient in the next 5 years.
Track record. This business has been around for a long time. Go and look at the numbers. They have had some operational difficulties before. Most notably in 2008, but they also had slow growth years in 2013-2015, and they have always found a way to get back on track. I think this time is unlikely to be different.
Lastly, buggs1815 thinks the valuation is compelling:
All of the issues above have weighed on the stock bringing us to today where it is trading at 13.8x 2026 [earnings per share] and a 2026 FCF yield of 7.9% or 12.7x FCF. These are the numbers people will be looking at in a few short months. The company thinks it can get back to double digit earnings growth, and I don't see a reason to doubt that they can, having put up growth rates like that for years and with the huge efficiency benefits possible from AI yet to come. If they get there, the stock is materially too cheap.
7) Finally, my friend Gabriel Grego of Quintessential Capital Management – who longtime readers will recognize as a successful activist short seller – likes UNH at these levels.
As he said to me in a private e-mail:
UNH presents a rare opportunity to buy a wonderful business at a bargain price. The company boasts powerful and sustainable competitive advantages, including significant economies of scale and scope, robust network effects, extensive proprietary databases, and strong customer switching costs. Furthermore, it enjoys significant tailwinds from favorable long-term trends, notably an aging U.S. population and the increasing adoption of AI, which promises substantial improvements in efficiency and effectiveness.
And as Gabriel continued:
Recently, UNH's stock has plunged nearly 50%, battered by a combination of government investigations, unexpectedly high utilization costs, management turnover, and diminished near-term earnings visibility. In my assessment, most of these headwinds are temporary, aside from the uncertainty around ongoing regulatory scrutiny, which remains less predictable.
Trading at roughly 10x normalized earnings, UNH shares currently appear severely undervalued, discounting all but the most extreme negative outcomes – scenarios I deem improbable. As regulatory clouds eventually dissipate, I anticipate UNH's earnings multiple reverting toward its historical average above 20x, combined with an earnings growth trajectory in the mid-teens annually. Under these conditions, investors could realistically expect long-term returns exceeding 20% per year.
As he concluded:
Opportunities like this, combining exceptional quality and deep undervaluation, are exceedingly rare.
Thank you, Gabriel!
Overall, I think UnitedHealth's stock looks interesting...
Yes, the company has behaved badly in certain areas and will likely face fines, regulatory headwinds, and reduced profits. But I think the stock price likely reflects all of this – and, ultimately, these are fixable problems.
Meanwhile, my Stansberry's Investment Advisory team and I will be doing more work on this. And as always, our subscribers will be the first to know if we decide the stock is compelling enough to add to the model portfolio.
If you're not already an Investment Advisory subscriber, you can learn how to become one right here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
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