United Health (UNH) is a managed healthcare and insurance company with a breadth of revenue streams from public and private sector operations. I am neutral on the stock.
Hedge Funds Turned Bearish
Hedge funds have turned bearish on United Health stock lately, with 13-F filings showing that total hedge fund holdings of UNH stock saw a net decrease of 2.8 million shares in the last quarter.
One can’t really position bets based on what hedge funds did in the previous quarter, but it certainly is an excellent way to gauge active trading risk. Hedge funds often work on Sharpe Ratios as they explain an asset or portfolio’s risk-return suitability.
While United Health’s historical Sharpe Ratio of 0.85 isn’t terrible, you’d ideally like to see a Sharpe Ratio range between 1.00 and 3.00 to justify the risk you’re taking on a stock. Again, this is a single observation, and readers should only use it as part of their analysis.
Change Healthcare Debacle
The Department of Justice filed a lawsuit to block United Health’s $13 billion purchase of Change Healthcare in a claim that the deal would “harm competition.”
Investors usually throw caution to the wind once lengthy lawsuits occur, as they could be costly and could disrupt the firm’s capital structure. Lawmakers and regulatory bodies are extremely anti towards industry monopolies to preserve the broader economic health, meaning that this could become a stretched-out process, adding unnecessary turbulence to UNH stock.
United Health is set to fight the case and stated: “The Department’s deeply flawed position is based on highly speculative theories that do not reflect the realities of the health care system. We will defend our case vigorously.”
The Stock Is Relatively Overvalued
United Health stock has provided solid gains to many investors lately, with a year-over-year appreciation of over 40%. However, the landscape has changed since then, and investors may have gotten ahead of themselves.
If we look at the stock’s valuation metrics, it’s worrisome that United Health is trading at a premium relative to its five-year average price multiples. UNH is trading at a non-GAAP price-to-earnings premium of 23% and a price-to-sales premium of 40%, suggesting that we could be due for a slight correction if the market had to revert to its efficient form.
Wall Street’s Take
Turning to Wall Street, United Health has a Strong Buy consensus rating, based on 16 Buys and two Holds assigned in the past three months.
The average United Health price target of $535.78 implies 9.2% upside potential.
Concluding Thoughts
As mentioned in my introduction, I don’t believe that we’re looking at a Sell here, but it’s worth noticing that United Health is on the brink of running out of steam, which could see the stock flatline for a prolonged period.
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