Buy, Hold, or Fade the Recent Rally in UnitedHealth Group (UNH) Stock?

UnitedHealth Group UNH stock is still down 40% year to date but has surged more than +20% this month following reports that Warren Buffett’s Berkshire Hathaway BRK.B and other billionaire hedge fund managers have taken a stake in the company, including David Tepper’s Appaloosa Management.

In a classic value investing move, Buffett undoubtedly sees long-term value in UnitedHealth Group as a high-quality business at a steep discount, investing in other industry leaders during a crisis like Goldman Sachs GS during the 2008 financial meltdown and more recently Occidental Petroleum OXY during the Covid-19 pandemic plunge in energy prices.

To that point, UnitedHealth has faced a DOJ investigation stemming from its health services and technology subsidiary Optum, and had previously suspended its full-year financial guidance due to unexpectedly high medical costs.

Considering such, investors may be weighing the pros and cons of investing in UNH, with some wondering if it’s time to fade the recent rally.

UnitedHealth’s Attractive Valuation & Balance Sheet

As the parent company of United Healthcare, the nation's largest insurer, UnitedHealth Group stock had recently fallen toward its decade low in terms of price to forward earnings and is still on par with its 10-year foward P/E median of 18X. 

Furthermore, UNH trades at less than 1X sales and has the scale, diversification, and cash flow that are likely attracting Buffett and other large investors to believe in its long-term recovery. Notably, UnitedHealth Group has more than $32 billion in cash and equivalents on hand and over $308 billion in total assets compared to $208.1 billion in total liabilities.

UNH EPS Revisions

Despite reinstating its guidance, UnitedHealth Group now expects full-year fiscal 2025 EPS to be considerably lower at a least $16 per share, with the Zacks Consensus currently at $16.58 and falling 25% over the last 60 days from expectations of $22.28.

While the drop in FY25 EPS estimates was expected, what may be more concerning to investors is that FY26 EPS estimates have dropped nearly 30% in the last two months from projections of $25.58 to $18.08.

Conclusion & Final Thoughts

The institutional pile into UnitedHealth Group stock may have set a psychological floor for investors, but the trend of declining EPS revisions does take away from the company's enticing valuation and suggests there could still be much better buying opportunities ahead. Correlating with such, it may be time to fade the recent rally, with UNH landing a Zacks Rank #5 (Strong Sell) at the moment.

For investors who may be interested in limiting the short-term risk associated with the recent volatility in UnitedHealth Group stock, Zacks analyst Sanghamitra Saha has alluded to the notion that the iShares U.S. Healthcare Providers ETF IHF could be a better way to get exposure to UNH.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research