While driving back from my nephew’s soccer game last weekend, I needed to pick up a prescription at my local pharmacy.
The line was moving at glacial speed, so I struck up a conversation with the woman in front of me, who mentioned she worked as a nurse at a UnitedHealth-affiliated clinic.
“Our patients are terrified about what’s happening to their insurance,” she confided. “But the executives keep telling us this is just a hiccup.”
Hiccup? UnitedHealth Group (UNH) has plummeted a staggering 50% in the past month. When the largest health insurer in America loses half its market value, Wall Street goes into cardiac arrest. Yet here I am, suggesting you consider this bloodbath a buying opportunity. Am I mad? Absolutely not.
Let’s break down why UnitedHealth’s current woes spell opportunity rather than disaster for smart investors.
First, the elephant in the room: President Trump declared war on Pharmacy Benefit Managers (PBMs), announcing he’d “cut out the middleman” in drug pricing.
This sent UNH, Cigna (CI), and CVS Health (CVS) into freefall. UnitedHealth took the hardest hit because it was trading at the richest valuation.
The PBM drama coincided with UNH’s CEO, Andrew Witty, stepping down for “personal reasons” after the company reported higher-than-expected medical costs, withdrew its guidance, and faces possible DoJ investigations. Talk about perfect storm conditions.
But here’s the reality check: UnitedHealth’s OptumRx PBM business isn’t disappearing overnight.
Even with regulatory changes, the company has already preemptively committed to passing through 100% of rebates to clients by 2028. Yes, margins will compress, but a full structural breakup of UNH remains a tail risk, not a certainty.
Looking at UNH’s back-of-the-envelope financials, we can guesstimate that about $3 billion of EBIT could be at risk. Even if this shaves off 10% of earnings, we go from $19-20 diluted EPS to $17-18, while the company’s growth engines continue humming.
At current prices, that’s a P/E of just 16x – a bargain for a healthcare giant that’s delivered 10.8% earnings growth compounded over two decades.
Meanwhile, other healthcare investments are surfacing as compelling alternatives or complements to a UNH position.
Eli Lilly (LLY) is proving resilient amid this healthcare chaos, with its GLP-1 drugs for diabetes and obesity creating a new growth runway that’s insulated from PBM controversies. Trading at premium multiples, but deservedly so.
For biotech exposure, consider Vertex Pharmaceuticals (VRTX), which maintains a virtual monopoly in cystic fibrosis treatments while advancing gene editing therapies that could revolutionize treatment for sickle cell disease. Their moat is nearly impenetrable.
Smaller surgery center operator Surgery Partners (SGRY) benefits from the persistent shift to outpatient procedures – a trend UnitedHealth itself is capitalizing on through Optum’s surgery center acquisitions.
When evaluating healthcare stocks today, I advise that you focus on three critical metrics.
First is the Medical Loss Ratio (MLR). For insurers, this percentage of premiums spent on medical care should ideally be 80-85%.
UnitedHealth’s MLR recently jumped to 87.6%, signaling pricing challenges that should normalize within 12-18 months.
Second is the Medicare Advantage Penetration. With America’s 65+ population projected to grow from 58 million to 82 million by 2050, insurers with strong Medicare Advantage market share (UNH commands 29%) have built-in growth runways.
Third is the Interest Rate Resilience. After suffering through a decade of near-zero rates, insurance companies like UNH now benefit from higher returns on their massive cash reserves and investment portfolios.
The aging population demographic is unstoppable, providing long-term tailwinds regardless of short-term regulatory headwinds.
And despite the Medicare pricing fumble, UnitedHealth’s appointment of Stephen Hemsley as CEO – the same leader who guided UNH through its massively successful 2006-2017 run – suggests a quick return to disciplined execution.
At $290, UnitedHealth offers an attractive 2.7% dividend yield with a forward P/E of about 12x earnings. The stock hasn’t been this cheap in a decade, and I’m adding to my position gradually, with plans to increase over the next few quarters as the fog clears.
Remember when everyone bailed on Apple (AAPL) after Steve Jobs died? Or Amazon (AMZN) during the dot-com crash? Smart investors recognize when Wall Street overreacts.
This healthcare sector correction is creating similar generational buying opportunities for those with the stomach to act when others panic.
As for me, I’m heading back to that pharmacy next week – but this time to pick up shares, not just prescriptions.
