Dow-30 member UnitedHealth is up about 39% in 2021.
The Q3 stats released in early November were robust and management raised its full-year profit forecast.
Long-term investors may want to consider buying dips in UNH stocks, especially if they fall towards $470.
Health insurer investors UnitedHealth Group (NYSE:), a member of the mega-cap, 30-component , achieve significant returns in 2021. Year-to-date, UNH shares have bounced back 38 .9%. In comparison, the Dow Jones US Insurance Index is up 24.9%.
On December 16, UNH shares hit an all-time high at just $497. But since that peak, they've fallen about 2% and traded around $487. The share price now supports a 1.2% dividend yield . And the stock's 52-week range was $320.35 – $496.96, while the market capitalization (cap) is $458.8 billion.
Management announced robust third quarter statistics on October 14. Revenue was $72.3 billion, compared to $65.1 billion a year ago. The mega-cap healthcare group reports revenues in two main segments:
UnitedHealthcarewhich provides health benefits to employers, individuals and beneficiaries of Medicare and Medicaid;
Optuma health information technology and innovation company providing a range of services to improve healthcare and insurance services.
Adjusted net earnings per share (EPS) came in at $4.52. Cash flow from operating activities was $7.6 billion. UnitedHealth also increased adjusted net income for the full year to $18.65 to $18.90 per share.
About the results, CEO Andrew Witty said:
“Our positive growth and business results are due to the 340,000 team members of Optum and UnitedHealthcare.”
Before the release of the , UNH's stock was about $450. On December 16, it hit a record high of $496.96. And on December 17, it closed at $487.12. Meanwhile, Goldman Sachs initiated coverage of UNH stocks with a buy recommendation on Dec. 14, adding to positive price momentum. Stocks
Of the 28 analysts surveyed via Investing.com, UnitedHealth stock has an "outperform" rating.
Chart: Investing.com
Analysts also have a median 12-month price target of $494.44 for the stock, representing an increase of more than 1.5% from current levels. In other words, Wall Street believes most of the good news has already been factored into its share price. The 12 month price range is currently between $360 and $570.
Graph: InvestingPro
According to a number of valuation models, such as those taking into account dividends and P/E or P/S multiples, the average fair value for UNH stocks, through InvestingPro, is $547.31, showing upside potential amounts to more than 12%.
In addition, we can look at the financial health of the company determined by ranking more than 100 factors relative to colleagues in information health. In terms of growth and earnings health, UnitedHealth scores 4 out of 5 (top score). Overall performance is rated " great."
The latest P/E, P/B and P/S ratios for UNH stocks are 29.7x, 6.5x and 1.6x. By comparison, those metrics for peers are 8.5x, 1.4x, and 0.7x. In other words, UnitedHealth stocks have a higher valuation level than its competitors.
Finally, readers looking at technical charts may be interested to know that several of the UNH's short- and medium-term indicators point to overbought levels and suggest caution.
In the coming weeks, we expect UnitedHealth shares to potentially fall to $470 or even slightly below. In that case, the $460 level should serve as initial support.
After such a potential decline, the stock is likely to trade sideways for several weeks until they establish a base, possibly around $460, at which point another leg could begin.
Add UNH stocks to portfolios
UnitedHealth bulls with a two-to-three year horizon who are not concerned about short-term volatility might consider investing in stocks around these levels for long-term portfolios. The target would be $547.31, the fair value implied by several models.
Alternatively, investors may want to consider purchasing an Exchange Traded Fund (ETF) that has UNH as a holding. Examples include:
iShares U.S. Healthcare Providers ETF (NYSE:): This fund is up 22.0% YTD and UNH stock weight is 25.34%;
SPDR Dow Jones Industrial Average ETF Trust (NYSE:): Fund is up 17.1% YTD and UNH stock weight is 9.05%;
Strengthen CWP Enhanced Dividend Income ETF (NYSE:): The fund is up 15.4% YTD and the UNH stock weight is 6.65%.
Finally, those who have experience with options strategies and think UNH stocks could fall further may prefer to do a bear put spread.
Most option strategies are not suitable for most retail investors. Therefore, the following discussion is provided for educational purposes only and not as an actual strategy to be followed by the average retail investor. Current price: $487.12
In a bear put spread, a trader has both a long put with a higher strike price and a short put with a lower strike price. Both branches of the trade have the same underlying stock (i.e. UnitedHealth here) and the same expiration date.
The trader wants the UNH shares to fall in price. However, in a bear put spread, both potential gains and potential loss levels are limited. Such a bear put spread is established for a net cost (or net debit), which represents the maximum loss.
Let's look at this example:
For the first part of this strategy, the trader can buy an at-the-money (ATM) or somewhat out-of-the-money (OTM) put option, such as the UNH February 18, 2022, 480-strike put option. This option is currently offered for $16.23. It would cost the trader $1,623 to own this put option which expires in just under two months.
For the second part of this strategy, the trader sells an OTM put, such as the UNH Feb 18, 2022, 470 strike put option. The current premium of this option is $12.85. The options seller would receive $1,285 excluding trading commissions.
Maximum risk
In our example, the maximum risk is equal to the cost of the spread plus commissions. Here is the net cost of the spread $3.38 ($16.23 – $12.85 = $3.38).
Since each option contract represents 100 shares of the underlying stock, i.e. UNH, we need to multiply $3.38 by 100, which gives us $338 as the maximum risk.
The trader could easily lose this amount if the position is held until expiration and both legs expire worthless, that is, if the price of the UnitedHealth stock on expiration is above the strike price of the long put ( or $480.00 in our example).
Maximum profit potential
In a bear put spread, the potential profit is limited to the difference between the two strike prices minus the net cost of the spread plus commissions.
So in our example, the difference between the strike prices is $10.00 ($480.00 – $470.00 = $10.00). And as we saw above, the net cost of the spread is $3.38.
The max profit is therefore $6.62 ($10.00 – $3.38 = $6.62) per share minus commissions. When we multiply $6.62 by 100 shares, the maximum profit for this option strategy comes to $662.
The trader will realize this maximum profit if the UNH stock price is at or below the strike price of the short put (lower strike price) on expiration (or $470.00 in our example).
Those readers who have traded options before will probably know that short put positions are typically assigned on expiration when the stock price is below the strike price (i.e. $470.00 here). However, there is also the option of early placement. Therefore, the position should be monitored until expiration.
Break-Even UNH Price at Expiration
Finally, we also need to calculate the break-even point for this transaction. At that price, commerce will neither gain nor lose money.
At expiration, the strike price of the long put (i.e. $480.00 in our example) minus the net premium paid (i.e. $3.38 here) would give us the break-even UNH price.
In our example: $480.00 ? $3.38 = $476.62 (minus commissions).
Bottom Line
We believe UNH stocks are a great addition to most long-term portfolios. However, after the recent price appreciation, valuation has become frothy. Therefore, a potential drop of 5%-7% could be in the cards in the near future. Interested investors might see such a decline as an opportunity to buy UnitedHealth stock.
