Analysis: UNH CVS

Health insurance stocks like UnitedHealth Group (UNH) are going through another round of vicious selling on Thursday. Over the past two days, investors have, in our view, blindly sold the group due to potential risks related to a recently introduced Medicare-for-All bill, which contains a proposal for a single national health plan that shuts out private insurers. We first addressed this topic on Wednesday in our Alert here.

Political views aside, this bill will be met with a multitude of challenges, with the most obvious two being support and funding. Can this bill gain support in a divided Congress? Probably not as the bipartisan support will not be there. Second, this program would be very expensive to fund as it would redesign the current system as we know it, and we already have a government that has trouble agreeing on how to spend the budget. Case in point: we just lived through the longest U.S. government shutdown in the history of this country.

Keeping those facts in find, we continue to believe the selling in the health insurance stocks has become overblown. UnitedHealth Group doesn't go through too many pullbacks like this, and we think there is opportunity here. UNH would be our first choice to CVS Health (CVS) , which we still believe has deep value at these prices but carries more risk due to its long-term care business. But keep this in mind. Because the political narrative is wrapped around these stocks right now, it would not surprise us to see another day or so of selling. A fear trade has set in and no one has ever made a dime panicking.

To put the UNH decline into a valuation perspective, this week's selloff has now brought UNH down to a 16.5x 2019 earnings multiple. This valuation looks pretty attractive when remembering that management guided for a 13% to 16% longer term growth outlook at their November 2018 Investor Day event. And as we reinforced yesterday through CEO David Wichmann's fourth quarter earnings call quote (see our Alert here), the company has grown "regardless of economic cycle or administration," and this is a tribute to the business model.

In UNH's case, the stock should also find support from its massive share repurchase program. As a reminder, in June 2018 the Board renewed a share repurchase program that authorized management to repurchase 100 million shares, or approximately 10% of the shares outstanding, over time. This management team will be right in there buying stock hand over fist.

And remember, our two health insurance companies are committed to finding ways to bring down costs for the consumer. Providing better health at lower costs was a core tent of CVS' acquisition of Aetna, and UnitedHealth Group's aligned services are positioned "to produce greater value for society, for clients, consumers..."