Why Warren Buffett and other top investors may find troubled UnitedHealth appealing right now

CNBC

6 hours ago

UnitedHealth shares are getting a much needed boost after high-profile investors including Warren Buffett and David Tepper unveiled new stakes in the scandal-plagued insurer. The health care stock popped 10% on Friday, on track for its best day in five years. The advance came after Buffett's conglomerate Berkshire Hathaway revealed a stake of five million shares , worth about $1.6 billion. The "Big Short" investor Michael Burry and Appaloosa Management's Tepper also disclosed sizable stakes in the company. It may come as a surprising move as UnitedHealthcare has become the poster child for problems with the nation's sprawling health-care system. The company recently suffered a string of setbacks , including a suspension of 2025 guidance , the abrupt departure of former CEO Andrew Witty and a Justice Department investigation into its Medicare billing practices. So, why are these top investors buying now? 50% off One unquestionable factor is just how cheap the stock has become. At its peak just nine months ago, shares closed at $615, topping a market capitalization of $500 billion. The stock has now been cut more than half, a rare occurrence for a blue-chip, household name that has been a member of the coveted Dow Jones industrial Average since 2012. "It is available now at a 50% discount. It will probably pay major fines and some executives may be forced to leave the company. But the company will survive and likely regain its prominence in the industry," said David Kass, a finance professor at the University of Maryland who has studied Buffett's methods for a long time. "Its finances are solid. It has above average profitability and a below average price to earnings ratio." UNH 1Y bar UnitedHealth in the past 1-year period Shares of the insurer traded at a price-earnings ratio of just under 12 Thursday, near its lowest in more than a decade. That compared to a 10-year average multiple of 23, according to FactSet data. The healthcare sector is the worst performer among the 11 S & P 500 groupings this year, down nearly 3% as of Thursday's close. "The sector has been under-loved and undervalued for a while," Robert Teeter, chief investment strategist at Silvercrest Asset Management, said on CNBC's "Worldwide Exchange" Friday. "You get some investors that are willing to step in and that creates a sense of momentum. It's an area that has a lot of potential for margin recovery." 'Surmountable' woes? Buffett has a history and reputation of avoiding conflict and controversy when it comes to investing. The last and perhaps the only time Berkshire had an investment embroiled in controversies was Wells Fargo , which conducted fraudulent practices that came to light in 2016. Buffett exited the position 2022. Berkshire's UnitedHealth bet is also an unlikely one given Buffett's longtime distain towards the industry. He previously called the healthcare industry a "tapeworm" on the economy due to its high costs. In 2018, he, along with Jeff Bezos and Jamie Dimon , launched a joint venture to improve health care for their employees and potentially for all Americans, but it was eventually shut down. Still, Buffett's primary focus is always on understanding the business itself, the cost and its long-term potential. Berkshire, with a gigantic footprint in the broader insurance industry, may have special insight into the health insurer. "UNH sports an undeniably cheap valuation but it comes under the cloud of a government investigation and questions about reimbursement levels," said Bill Stone, Glenview Trust Company CIO and a longtime Berkshire shareholder. "Buffett is always interested in strong franchises that he thinks are dealing with surmountable short-term woes and that could be his view here." Long time horizon The size of Berkshire's stake — $1.5 billion — indicated to some that Buffett's two investing lieutenants, Todd Combs and Ted Weschler, were more responsible for this purchase rather than the "Oracle of Omaha" himself. Though, it's probable that Buffett and incoming CEO Greg Abel blessed this move. What sets Berkshire apart from others is its buy-and-hold long-term approach, which could work to its advantage as UnitedHealth seeks to avert its crisis and regain public trust, according to George Hill, a healthcare analyst at Deutsche Bank. "Berkshire clearly has the one attribute many investors do not have, which is duration," Hill said in a note to clients. "While we believe that UNH shares appear attractively valued on a three-plus year time horizon, UNH's next two years could be very choppy from a membership, reimbursement and profitability perspective." UnitedHealth owns the nation's largest and most powerful insurer, UnitedHealthcare, and is often viewed as the industry's bellwether. Wall Street analysts have welcomed with the return of Stephen Hemsley to lead the company again. Hemsley is widely credited as the CEO who transformed the company into the conglomerate it is today. UnitedHealth's 2024 was a particularly tough one. It grappled with the murder of the UnitedHealthcare unit's CEO, Brian Thompson, the torrent of public blowback that followed and a historic cyberattack that affected millions of Americans.