Can still see her face in the rear view mirror. Though the image gets smaller and smaller as we move forward, we can still see the friendly smile, the polite wave goodbye. What a pleasant visit that was. The sweet month of November fades into memory. So many target prices met. So many sales made. A skinny portfolio close to the top is good thing when the worm turns, as a good year (so far) winds down. Yet, a skinny portfolio presents some problems of its own. High cash levels. Right now that's a positive, but a strategy that does not make. Portfolio imbalances are another issue. Personally, sure, I do have exposure to the Healthcare sector. In big pharma. In Bio-Tech. Since selling my CVS Health (CVS) long at target though, I do not have exposure to health insurance or to managed care, which reminds me. UnitedHealth Group (UNH) holds the firm's annual shindig (Investor Conference) this very day (Tuesday). In fact, the event is already underway.
Coming In
Ahead of the day's big event in New York City, UnitedHealth raised guidance. For the full year 2019, with three quarters already in the books, the firm guides revenue toward $242 billion, and adjusted EPS to $15, at the upper boundary of a previously indicated range of $14.90 to $15. The street in case you wondered is already here, with consensus view at $242.6 billion, and $14.96, respectively. For next year (2020), the firm guides performance to revenue generation of $260 billion-$262 billion. Wall Street is at $260.8 billion for 2020. UNH now expects adjusted EPS for 2020 to land somewhere between $16.25 and $16.55. A minor issue there might be that the midpoint of $16.40 would be below industry consensus of $16.46.
Investors should know that also on Monday, four star analyst Steve Valiquette of Barclay's reiterated his overweight rating for UNH, while dramatically raising his price target from $260 to $305. Valiquette does have a successful track record in this name. This also came one week after Ann Hynes of Mizuho, who is also rated at four stars, and was featured at the Barron's website at the time, reiterated her buy rating for these shares, and raised her price target from $270 to $300. Hynes did mention the unknowns that circle around Medicare and Medicaid in the current environment.
Three Thoughts
One... There is no doubt in my mind that the firm is executing at a high level. Cash Flow from operations is a big deal here. This is what keeps the equity repurchase program in place. The firm understands that investors understand this. For the third quarter, cash flow from operations printed at $3.2 billion, bringing the nine month total to $12.258 billion, well above net earnings of $10.571 billion due to depreciation and amortization. Both of those lines show substantial improvement over 2018. The firm makes a point of guiding cash flow from operations for 2020 to a lofty $19 billion to $19.5 billion. To me that means that when buying these shares, particularly should they trade at a discount, that the company is buying the shares outside of you.
Two... While there will certainly be political risk across the entire space, and that does present as a clear uncertainty, there are two certainties. The United States is not going to run out of sick people or older people anytime soon. The addressable market will only grow with time, and includes us all.
Three... The growth in sales, most of the growth in earnings, and real growth in operating margin, has been in the Optum health services business that works through technology (big data) to smooth and improve the quality of care while reducing expense, and finally make better the interaction between the physician and the end user (the patient). Understand that this segment now approaches the point where it drives almost half of total revenue at an operating margin of 8.2% versus 5.5% for the entire ball of wax.
The Chart
Year to date, this stock has completed two round trips that display a near perfect double bottom that provided "V" shaped support down around $210 twice, and a twice tested pivot just below $270. The name has already successfully launched off of that pivot. The current selloff induced by trade related (not a factor here) pressure on the broader market does interest this investor.
I would love to get a little bit aggressive on the long side should the shares show enough weakness to test the already established pivot from above. Do we get that opportunity? Hard to say. The shares do tend to move back toward the 50 and 200 day SMA when this far away. That said, UNH just experienced a "golden cross" last week.
My Trade Idea (minimal lots)
- Purchase 100 shares of UNH at or close to the last sale of $274.60.
- Sell (write) one UNH December 20th $280 call (value: $2.90)
Note: This is known as a Buy-Write. Selling the call reduces net basis to $271.70, while capping potential profit just over 3% for two weeks' time without increasing equity risk.
Optional Play (minimal lots)
- Sell (write) one UNH December 6th $270 put (value $1.25)
Note: This "little extra" does increase potential equity risk for the remainder of this week, while further reducing net basis to $269.75, which is where I think the shares are more attractive. Worst case, the investor enters the weekend long 200 shares of UNH at a net basis of $270.23 with the shares trading below $270.
(CVS and UnitedHealtcare are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells these stocks? Learn more now.)
