UnitedHealth Group (NYSE: UNH) Looks Like It Wants To Cool Off

UnitedHealth Group NYSE: UNH has been one of the best performing healthcare stocks this month and shares are trading within 2% of their all-time highs. Having fallen more than 25% from the end of last year through this past September, not many would have guessed that the $265 billion healthcare products and the insurance company were capable of turning the story around. But that’s exactly what they’ve done.

Shares are up 30% in the past 2 months as management look to finish the year off on a strong note for a change and the bulls on Wall Street will be happy that this end of year rally has been driven by fundamental performance. When the company reported their Q3 earnings in October, shares were close to their 52 week low. However a solid EPS and revenue beat on analyst expectations lit the flame that has them close to their 52-week highs now.

Secret Weapon

A guidance boost from management has helped them to keep their momentum going in the meantime. On the earnings call, David Wichmann, the group CEO, said that “Optum and UnitedHealthcare are driving value for our customers, creating momentum to finish the year strongly and move into 2020 with an intense focus on accelerating the growth of our businesses by advancing quality, affordability and satisfaction for those we serve.''

It’s interesting that he specifically named Optum. UnitedHealth Group is split between two main divisions. UnitedHealthcare is the heavyweight and generates revenue from insurance plans. Indeed, up to 80% of the group’s revenue comes from premiums. But Optum provides an impressive secondary source of revenue and is the group’s so-called ‘secret weapon’. 

October’s revenue beat was largely driven by double-digit percentage growth in Optum’s numbers so it’s no surprise that CEO Wichmann purposefully called them out for praise.

Diplomat Acquisition

Just as the post-earnings honeymoon period might be expected to start fizzling out, the company announced their acquisition of Diplomat Pharmacy NYSE: DPLO earlier this week for $4.00 a share. Specifically, it’s being acquired and assimilated into Optum’s operations. All in it will cost about $300 million.

Shares of the specialty pharmacy have been on the ropes for months and were down over 50% for the year before news of the acquisition broke this week. However, they were still trading at a $2 premium to UnitedHealth’s offer so investors were left running for the exits as Wall Street promptly took them straight down.

UnitedHealth clearly smelled blood after Diplomat’s latest earnings in November. The company reported a much larger than expected loss for the third quarter in a row and warned of a ‘going concern’ - in other words, there was a growing threat of bankruptcy.

It looks like a good move from UnitedHealth as they bolster their best performing division. Compared to other healthcare stocks, it’s holding its own and is one of the strongest performing out of the big ones like Molina NYSE: MOH, Cigna NYSE: CI and Anthem NYSE: ANTM in recent years.

Technicals

However, for investors looking to get involved, it might be worth holding off for the moment from a technical point of view. The stock has had a fast and furious rally and UNH shares have traded sideways for nearly 3 weeks. With each passing day that they don’t push on to fresh highs, the likelihood increases that they’ll turn the other way - at least in the short term. A bearish MACD crossover last week also lends credence to the bear case.

After a stunning run since October, there’s nothing wrong with some profit-taking here but it’s important that shares don’t retrace too much. The $250 level wouldn’t want to be broken or else it will look as if investors have lost faith in management’s ability to deliver on their promises.

With that in mind, all eyes will be on next month’s earnings report to see if things are truly as rosy as management think they are and if the 30% move from October was justified. In the meantime, don’t be surprised if shares cool off.

For more ideas on stocks to watch in the healthcare sector, check out our recent article on Two Health Care Stocks That Are On The Move.