UnitedHealth stock (NYSE: UNH) recently experienced a 6% drop following the announcement by the U.S. Centers for Medicare & Medicaid Services that Medicare Advantage payments would increase by an average of 3.7% in 2025, falling below street expectations. This not only impacted UnitedHealth but also other healthcare providers such as Humana, Molina Healthcare, and CVS Health, which have been struggling with rising medical costs. UnitedHealth’s medical costs to benefits ratio also increased to 85% in Q4’23 from 83% in the prior-year quarter, causing investors to react and leading to a 5% drop in UNH stock after the Q4 results. Year-to-date, UNH stock has fallen by almost 15%.
Despite the recent decline, UnitedHealth stock has shown strong gains over the longer term, increasing by 30% from early January 2021 to around $460 currently. However, the stock’s performance has been inconsistent, with returns of 43% in 2021, 6% in 2022, and -1% in 2023, underperforming the S&P 500 in the last year. It has been challenging for individual stocks in various sectors, including Health Care, to consistently beat the S&P 500 in recent years. In contrast, the Trefis High Quality Portfolio, consisting of 30 stocks, has outperformed the S&P 500 each year over the same period due to better risk-adjusted returns.
With uncertainties in the macroeconomic environment such as high oil prices and elevated interest rates, there is speculation about whether UNH stock could face another underperformance similar to 2023. However, some analysts believe that the stock is currently undervalued, estimating a valuation of $605 per share, representing over 30% upside potential from its current level. UNH stock is currently trading at under 17x forward expected earnings of $27.70 per share for the full year 2024, compared to the last three-year average of 21x. Despite challenges such as rising medical costs and Medicare Advantage payments falling short of expectations, the company has maintained its earnings outlook for 2024, showing optimism in its business.
Despite the near-term challenges, investors are encouraged to view the current dip in UNH stock as an opportunity for long-term gains. While UnitedHealth’s stock shows potential for growth, it is essential to examine how the company’s peers are performing on key metrics. By conducting peer comparisons, investors can gain valuable insights into the industry and make informed investment decisions.Overall, with the negatives priced in, UNH stock may present a good opportunity for investors looking for robust gains in the long term.
