An Insider Bought Dow Component UnitedHealth
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A Form 4 filed with the SEC has disclosed that Rodger Lawson, a member of the Board of Directors at UnitedHealth (NYSE: UNH), bought 2,000 shares on January 18 at an average price of $54.42 per share. Lawson now owns close to 17,000 shares of the stock directly. UnitedHealth, a health insurer who joined the Dow Jones Industrial Average last year, has risen 25% since a year ago. Insiders should hesitate to purchase more shares of the company’s stock, since they already benefit financially when business is good and see their income decline in bad times. The exception would be if the benefits of diversifying are trumped by a particularly strong chance of a gain in the stock price; this in our view is why stocks bought by insiders tend to do well (read more about studies on insider trading).
UnitedHealth’s revenue was up 11% in the fourth quarter of 2012 compared to the same period in 2011, but margins contracted and as a result earnings were actually down slightly. The 12% growth rate in medical costs was particularly notable. For the year as a whole, the company reported a 9% increase in sales and a 7% increase in net income. The market capitalization of $58 billion- the largest among publicly traded health insurers- values UnitedHealth at 11 times trailing earnings. Analyst expectations are for low growth in the next couple years and so current-year and 2013 P/Es are in the 9-10 range. These are low valuations, and even if the company does not see much of an increase in earnings it could be a good buy at these prices. We’d also note that UnitedHealth Group Inc. has a beta of 0.5, indicating that it is somewhat protected from market downturns.
UnitedHealth was one of the most popular healthcare stocks among hedge funds in the third quarter of 2012, according to our database of 13F filings (find more healthcare stocks hedge funds loved). Billionaire Dan Loeb’s Third Point reported a position of 2 million shares, an 11% increase from three months earlier (see more of Loeb's stock picks). Renaissance Technologies, whose founder Jim Simons is now a billionaire, and fellow billionaire Leon Cooperman’s Omega Advisors were two other hedge funds with significant positions in UnitedHealth.
The company’s peers include Aetna, Humana, WellPoint, and David Einhorn favorite Cigna (NYSE: CI). The pricing at these other insurance companies is very similar to that at UnitedHealth: when we look at the industry, we generally see trailing and forward earnings multiples of 10 or lower. We think that this makes any insurer at least worth considering as a value stock. Of this group, Cigna stands out as recording impressive revenue and earnings growth in its most recent quarter versus a year earlier, though certainly some of that growth is due to a recent acquisition and Cigna’s organic growth potential should be evaluated further before concluding that it is particularly attractive. Besides that, earnings growth in the industry has tended to be very limited, generally within 5% of its levels a year ago.
We like UnitedHealth’s valuation, along with that of many other insurers, in any case. Given the insider purchase worth over $100,000 and the confidence that should signify, we would lean towards considering UnitedHealth a good value and we think that investors should do more research on the company. If investors pass on UnitedHealth for reasons other than a general dislike of health insurance companies as investments, they would then be well served to consider peers in the industry.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!