UnitedHealth Group is Monday's IBD Stock Of The Day as the Dow Jones giant's outlook for steady growth stands out amid geopolitical worries and inflationary pressures buffeting the broad stock market. UNH stock rose near a buy point in afternoon stock market action.
UnitedHealth, part of the flagship IBD 50 list of leading growth stocks, is among a group of managed-care stocks solidly outperforming the broad market. Rivals Anthem, Centene and Molina Healthcare are all near buy points as well.
Why Managed Care Stocks Are Defensive
The Medical-Managed Care industry group has climbed to the top tier, now ranked No. 40 of 197 groups by IBD based on price performance and momentum, up from No. 89 six weeks ago.
The group offers a significant degree of shelter from the inflationary and wage pressures squeezing many industries, as well as relative protection from geopolitical concerns. Meanwhile, higher interest rates are a positive for the group. Like other insurers, they keep a lot of liquid assets on hand to pay out benefits. UnitedHealth's 10-K says that a 1% rise in interest rates across the yield curve adds $183 million in income.
The managed care sector has relatively predictable earnings because people keep spending on health care in good economic times and bad. In a recession, enrollment in commercial insurance plans may drop amid layoffs, but that's offset by Medicaid enrollment growth.
Government Policy Risk Fades
The strong recent performance of managed care stocks also has been helped by government policy.
On Feb. 2, the Centers for Medicare and Medicaid Services proposed an 8% hike to Medicare Advantage plan payments for 2023. In a note to clients, Deutsche Bank analyst George Hill wrote that the proposed hike far outstripped expectations of 1.5%-2.5%.
From a broader perspective, one of the reasons managed care stocks are living up to their defensive billing is because government policy risk has largely faded. Joe Biden's Democratic primary victory in early 2020 downgraded the risk of Medicare for All displacing commercial insurance.
The more recent demise of Biden's Build Back Better plan and rising electoral prospects for the GOP suggest that even narrower reforms, such as a public insurance option, are off the table.
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UnitedHealth's Strategic Foresight
The status quo is bullish for UnitedHealth, which is credited with the strategic foresight to capitalize on changes put into motion by the 2010 Affordable Care Act. UnitedHealth's rivals have done their best to copy the Minnetonka, Minn., company's blueprint, to the extent possible.
Through years of investments and acquisitions, UnitedHealth has "assembled the most powerful set of assets" in health care, Jefferies analyst David Windley wrote in a Nov. 30 research note.
Those assets that now make up Optum's three divisions are key to capitalizing on the shift to value-based care, which could add $100 billion in annual revenue, and potentially much more, over a multiyear period, Windley tells IBD.
To understand why value-based care is such a big deal and how it works, check out as IBD's weekend New America feature on UnitedHealth.
UNH Stock
UNH stock rose 1.05% to 487.92 on Monday. That leaves UNH stock less than 3% below a 500.10 handle buy point from a double-bottom base.
UNH stock's relative strength line, the blue line in the chart provided that tracks a stock's progress vs. the S&P 500, has been hitting record highs lately.
UNH stock found support at its 50-day and 10-week moving averages at the end of last week. For leading stocks with a track record of reliable earnings growth and stock performance, such as those on IBD's Long-Term Leaders list, the 50-day average can be a good place to buy.
Before the Medicare for All scare and volatility around Covid-era earnings, UNH stock had been a member of the Long-Term Leaders list. With both political risk and Covid on the wane, perhaps UNH will make a return appearance.
ANTM stock and Molina fell modestly Monday, while Centene rose slightly. But all are close to buy points, with RS lines at or near record highs.
