UnitedHealth: Be Greedy When Others Are Fearful

It now offers more than a 50% margin of safety to the fair value.

May 25, 2025

It was 2022…

I remember the exact progression of the events:

Inflation proved more persistent than the Fed predicted.
The Fed started to increase rates earlier than forecasted.
The rate hikes were way faster than predicted.

Into that macroeconomic environment, Meta announced in its earnings call the first-ever decline in active users in its history.

Shares plummeted 20% instantly. That was f*ucking brutal.

I remember the headlines:

Nobody is using Facebook anymore.
TikTok is disrupting Instagram.
Metaverse is an empty bet.

Bear arguments seemed so reasonable—Facebook apps were all saturated, ad prices were already optimized, and apps were already full of ads.

It looked like there was literally no way Meta could keep growing revenue fast.

Result? Shares declined more than 70% in a year!!

This wasn’t a freaking altcoin, it was the fourth largest company in the world and it lost more than 70% of its market cap in a year…

Though it looked ugly, there were bullish arguments too:

This is a company that has the strongest network effects in the world.
Demand for digital advertising will continue to increase.
It has immense pricing power.

They argued that loss of users stemmed largely from inflated growth in the Covid era, as those who wouldn’t otherwise use the apps had given them a shot in lockdown and now they were pulling back.

Let me tell you this—betting on the bullish scenario was extremely uncomfortable.

If you had the bearish view at the time, you kept your money in your pocket so you would be comfortable.

But betting on the bullish view is extremely uncomfortable as you are taking money out of your pocket and putting it on the table, as all the price action, headlines, and sentiment are against you.

What I want you to internalize is that this uncomfortable position is exactly why investors are rewarded in the stock market.

You assume the risk when others don’t, you give up your comfort, and you are rewarded handsomely if you are right.

This is the only way.

If you aren’t right, you don’t make money; but if you are aligned with everybody and everything, you don’t make any money either.

Everybody has the same influences. Everybody thinks pretty much the same. Everybody anoints the same winners and the same… and criticizes the same losers. And obviously, tomorrow’s winners are usually found on the pile of today’s losers, not on today’s pile of today’s winners.
Success in investing requires taking uncomfortably idiosyncratic positions.
—Howard Marks

Those who bet on Meta back in 2022 made 6x their money in 2 years. It was Meta they were buying, not a no-name scam coin pumped by a 21-year-old influencer.

Today, UnitedHealth is in the position of being that uncomfortable debt…

It’s now down 43% in the last twelve months, negative news is being published non-stop, and it’s hard to find anybody who is bullish…

Bearish arguments are abundant:

Medical costs are rising.
Regulatory risks are mounting.
The government is investigating it for fraud.

Yet, when you look at the data, this business grew revenues 11% annually in the last 5 years.

You know what’s even more surprising?

Last quarter, it posted its first earnings miss since 2008!

Yet, the stock is priced like it’s heading to bankruptcy.

And just like Meta in 2022, there are bullish arguments too:

It’s still the fastest-growing provider despite its size.
Vertical integration allows it to use operational leverage.
It can easily go back to growth by bidding up for 2026.

And again, this is an uncomfortably idiosyncratic bet…

I don’t know whether it’ll be similar to Meta, I have no idea how long it’ll take, and I am nobody to tell you whether it’s committing fraud or not.

But I know one thing—this is a setup you need to bet on.

And I know that UnitedHealth has all the business fundamentals to make it work.

In this write-up, we’ll discover why this is the case, and I warn you—this is going to be a detailed one!

So, let’s cut the BS and dive deep into this:

What you're going to read:

1. Understanding The Business

2. Competitive Analysis

3. Risks

4. Investment Thesis

5. Fundamental Analysis

6. Valuation

7. Conclusion

🔑🔑 Key Takeaways

🎯 UnitedHealth is a vertically integrated healthcare provider, operating the largest health insurance system and care provider network in the US.

🎯 It has a giant moat as the vertical integration allows it to pull many levers to boost profitability, which gives it efficiency and thus a pricing edge over the competitors.

🎯 There are risks as medical costs and activity rates have been rising above its expectations, and it’s subject to increased media attention and regulatory scrutiny.

🎯 There is a high chance that the headwinds could prove temporary, and it will return to growth as the healthcare spending will double in the next decade, and there is no alternative provider that could absorb UNH’s business.

🎯 Valuation is attractive as it’s currently trading at a 50% discount to fair value.

🏭 Understanding the Business

I am surprised that everybody seems to know UnitedHealth, but most people don’t really understand the business—how it operates and how it makes money.

It looks simple. It provides health insurance, gets the premiums, pays the claims, and keeps the spread.

For UnitedHealth, it’s not that simple.

Let me give you a mind-blowing fact to understand the difference. Here is how some healthcare stocks performed since 1985:

Cigna, up 48x.
CVS Health, up 9x.

UnitedHealth?

It made a freaking 920x since 1985:

It hasn’t achieved this by following the same patterns and the business model as other providers.

UNH isn’t just a simple health insurance company, it also operates the largest care provider network in the system.

It saw a critical point—health insurance is a heavily regulated business with razor-thin margins and a lot of unpredictability.

Underwriting perfection isn’t enough to be continuously profitable in this market, there are a lot of elements that are too volatile, such as medical inflation, activity rates etc…

There is only one way to be continuously profitable—you have to control the whole value chain.

This allows you to reduce unpredictability and offset the harms of it.

Instead of just paying claims, you follow the clients and try to keep them healthy; when something comes up, you direct them to the best possible care provider, decreasing wasted time and money; you negotiate with drug manufacturers to reduce prices of commonly used drugs, decreasing both your costs and co-pays of the cleints etc..

It takes a massive operation.

This is what UNH has done better than others: It owns the whole value chain and has perfected this business model.

It does this through its two main operational businesses—UnitedHealthcare and Optum.

UnitedHealthcare is the unit that provides the health insurance as we know it, plain and simple.

It receives the premium, pays the claims, and keeps the spread. This is what this business is in essence.

It has three segments here:

Employer & Individual

It serves employers who buy insurance for their employees and individuals who directly buy policies for themselves.

It has two business models in this segment—either it assumes the risk and provides the care by charging fixed premiums, or it administers the plans for big companies that are self-insured.

The first is straightforward insurance as we know it, and the second is a risk-free business model that is fee-based. Big employers like Amazon, Microsoft make too much money that they don’t need to insure their employees from external providers. Instead, they pay the cost of care by themselves.

They pay insurance companies like UnitedHealth to draw plans and determine benefits, process claims, build networks, negotiate rates with hospitals, run support lines etc…

You can think of it like big companies paying UnitedHealth to use its insurance infrastructure while paying the claims themselves.

That’s it, straightforward.

Medicare & Retirement Segment

This segment covers Medicare eligible people, i.e, seniors over 65 years old and people with certain disabilities.

Here, UnitedHealth gets a fixed payment per patient from the government to provide full care.

Community & State Segment

Here, it administers Medicaid plans in partnership with state governments. States pay a monthly fee per enrollee, and UHC handles care management, claims, and support.

That’s it.

What you need to see here is that, except for administering the self-funded plans of big employers, UnitedHealth assumes the risk in all business models here.

This is a huge operation, and this is where Optum comes in.

Think of Optum like a giant support unit that makes it possible to run this huge insurance organization. It’s a health services company.

I hear you ask—what the hell is a health services company? It’s too vague.

It’s vague because UNH wanted it to be, because Optum does many things at once.

It provides care through Optum Health Services.
Optum Insight provides data and software solutions for all healthcare providers from hospitals to insurers.
Optum Rx provides pharmacy benefit management.

What the hell does each of these mean?

Let’s explain simply.

Optum Health

This is a giant network of care providers, i.e, doctors, clinics, and surgery centers. These are the places where you actually go when you have health problems and use your insurance.

You visit the doctor, your insurance pays for it.

For small insurers, that could be a third-party doctor or a partner doctor.

Instead, what Optum Health does is create a huge network of such providers, i.e, general practitioners, specialized practitioners, and surgical centers. These are either directly run by Optum, and doctors working there are Optum employees, or they are in partnership with Optum, offering lower rates when a patient comes from the Optum network.

It makes money by charging you or your insurance provider the cost of your visit and treatment. That’s it.

Optum Insight

Think of it like the market intelligence segment of S&P.

Over decades, UNH created a massive data pool that could be used to improve actuarial decisions by insurers, boost service quality by hospitals, and spot patient groups for medical trials.

On top of this data pool, it also created a software stack that hospitals and other insurers can use to seamlessly bill patients and insurance carriers, process claims, and boost efficiency.

The business model here is long-term contracts that are won by direct marketing.

As of the end of 2024, this segment had a backlog of $32.8 billion.

Optum Rx

This is one of the integral parts of the UNH business—it’s a pharmacy benefit management business (PBM).

Now what the hell is that??

Insurers have to create a list of drugs that they cover. This list consists of drugs that are fully covered and drugs that require changing percentages of co-pay. These lists are called “formularies.”

The sheer number of people insured gives insurers bargaining power against the drug manufacturers.

Think of it like this: Different manufacturers may be producing the same simple antibiotics under different brand names and patents.

There is no substantial difference between the products. In this case, patients tend to get the drug their insurance covers. If one drug is in the formulary and others aren’t, it’s going to sell way more than others.

Knowing this, PMBs negotiate with drug manufacturers to get discounts and rebates to put their drug in the formulary.

Then, they also partner with local pharmacies to ensure the convenient distribution of the drugs.

It makes money on fees and the spread.

Insurers pay PBMs to manage their pharmacy benefit programs, i.e, negotiate with manufacturers, create formularies, and manage distribution.

On top of that, let’s say it’s agreement with the insurer allows it to keep the cost savings above 20%. If the PBM gets a $22 rebate from a manufacturer for a drug that originally costs $100, it can keep $2.

Here is a sample scenario:

Jane has UnitedHealthcare insurance, managed by Optum Rx. She gets a prescription for a drug that requires a co-pay.

Doctor sends prescription → Optum Rx checks it against Jane’s formulary.
Optum Rx approves the drug and checks for a cheaper alternative.
Jane chooses to pick it up at Walgreens (an Optum partner pharmacy).
Walgreens dispenses the drug and bills Optum Rx.
Jane pays her copay (let’s say $35).
Optum Rx pays Walgreens the remainder (let’s say $185).
Meanwhile, Optum collects a rebate ($75) from the drug manufacturer.

Optum might:

Keep a portion of the rebate as profit.
Pass the rest to UnitedHealthcare.

Do you see where it goes??

If the insurer is UnitedHealthcare and the PBM is Optum, UnitedHealth groups will be like taking the money out of the left pocket and putting it into the right pocket. It’ll only pay the negotiated rate to the manufacturer, and savings and rebates will directly flow to UnitedHealth Group’s bottom line.

It’s the same for other segments too, especially Optum Health. If it’s both the insurer and the care provider, most of the money flow will be like an internal capital allocation, and UNH will have many levers to pull to boost profitability.

This is exactly what distinguishes UNH, allowing its stock to make 921x since 1985, and it’s what will allow UNH to keep thriving.

It creates a giant competitive advantage.

🏰 Competitive Analysis

Let’s get something straight: Competitive advantage doesn’t stem from the product necessarily; it stems from the business model.

More precisely, it necessarily stems from the control you have over the value chain.

What the hell does this mean?

You may be selling a unique product, like an iPhone, where you have total control over the product. In that case, Apple has total control over the value chain:

It decides the hardware.
It decides the software.
It builds distribution.
It decides the price.

By pulling these levels in a way unique to Apple, it creates some sort of value package, and that’ll have no alternative for those who like that package. Nothing will be totally the same.

On the other hand, you may also be selling a commodity product, in which case, you don’t have control over the nature of the product. Rubber is a rubber, oat is oat, oil is oil.

In this case, if you don’t own some other parts of the value chain, like distribution, you have 0 control over the value chain and, naturally, you can’t bend the value chain to create a competitive advantage.

This is why commodity sellers build businesses to control other parts of the value chain, as they can’t affect the nature of the product.

This is what’s famously called vertical integration and it’s how UnitedHealth creates an edge:

Let’s set this right: Insurance tends to be a commodity product.

Receive premiums, pay the care providers, keep the spread. Those who can match a certain level of underwriting quality end up with similar businesses in the absence of other levers, such as vertical integration.

How does UnitedHealth’s vertical integration work?

It’s actually simple:

It’s the insurance provider, it collects premiums, it pays the care providers.

In UnitedHealth’s case, in most patient cases, it pays Optum Health as the care provider instead of external providers like third-party clinics or hospitals.

This allows it to enhance the positive spread between the premium and cost of care because if the doctor provided care wasn’t an Optum employee or partner but a complete third-party, he would have additional business costs, so he would end up charging more for basically the same service.

By using Optum, UnitedHealth:

Avoid markup.
Control costs more tightly.
Manage care more efficiently (reduce duplicate tests, overuse, etc.).
Possibly steer patients toward lower-cost, higher-outcome pathways.

Similar added leverage happens in the Optum Rx unit too.

Imagine if UnitedHealth didn’t own Optum, it would have to work with another PBM. It would have to pay that PBM for services. Plus, that PBM could also keep some of the rebates it negotiated.

Now exact opposite happens, UNH significantly benefits from Optum Rx:

It doesn’t pay anybody outside the group to manage pharmacy benefits.
Rebates kept by Optum flow to the group's bottom line.

And it doesn’t end here…

Though UNH owns these businesses, their services are essential to other insurance carriers too.

Not every insurance provider is as rich as UNH to create an as extensive care network as Optum Health or a PBM as Optum Rx.

What happens is that they also use Optum Health and Optum Rx to provide care and benefits to their clients, so Optum generates significant external revenue, too.

Take a look at this, all its reporting segments are generating over $1 billion quarterly net income now:

This is the power of vertical integration. It allows UnitedHealth to double capitalize on its value chain:

Vertical integration allows it to cut costs by controlling the value chain.
Vertically integrated units are also great stand-alone businesses, generating significant revenue.

This is already really hard to replicate, but at scale, it becomes impossible to match.

Picture this:

UnitedHealth has 51 million members worldwide.
Works with more than 250,000 employers.
It has more than 1.7 million physicians and 650,000 hospitals worldwide in its care network.

You can insure a few thousand people and partner with a few hundred care professionals and say you are vertically integrated, but reaching this scale isn’t possible, not in decades.

For your care provider network to become as extensive as Optum, you need a huge bargaining power.
For that bargaining power, you need millions of members.
For millions of members, you need to sign with thousands of employers.

This is even harder given that there is literally no green market you can expand into without competition. Healthcare is a mature market where you need to steal clients from existing providers.

That’s nearly impossible to do.

Regardless of how they don’t like their insurers, people tend to be very unwilling to switch, as humans prefer the risk they know to uncertainty.

Plus, for any alternative provider, it’s almost impossible to match UNH’s prices as its vertical integration allows it to create a Costco-Amazon-like flywheel:

Its vertical integration allows it to cut costs.
It passes some of those savings to clients, offering cheaper premiums.
Cheaper premiums attract more clients, boost scale, and operational leverage.

This is a giant, giant competitive advantage that is almost impossible to penetrate.

So, if this is the case, why is UNH stock suffering?

🚨 Risks

In UnitedHealth’s case, we can compile the risks under three categories—business risks, compliance risks, and regulatory risks.

⚠️ Business Risk

The biggest business risk ahead of UnitedHealth is the possibility that medical inflation may increase more than its forecasts, cutting its overall profitability.

This is actually the main reason why the profitability has declined significantly in the last quarter.

Take a look at this:

This means that medical inflation basically exceeded the company’s expectations since Q4 2023. Thus, many of the policies it predicted to be profitable ended up in a loss.

Now these inflationary pressures will likely persist in the short to medium term as the US needs to refinance $9 trillion this year, and tariffs are also adding to inflationary pressures.

On top of that, add the fact that UNH absorbed many clients dumped by other carriers in the last quarter. It added more than 700,000 clients, and most of them ended up with UNH as their carriers weren’t able to extend their policies at the low prices they were paying, and UNH was the only alternative.

These people started to show increasing activity as soon as their coverage began, as they were afraid that UNH could dump them, too.

As a result, the company had to pay for unexpected activity at unexpectedly high rates.

Given the macro environment, there is a high possibility that such pressures will remain.

⚠️ Compliance Risk

UNH has often been accused of committing irregularities in its operations.

This largely stems from the fact that health insurance is a cost-cutting business. You need to reduce costs to increase profits, as you don’t have much pricing power at the policy level.

This is why it’s been long scrutinized for its high rejection rates and care practices.

Some sources recently circulated a chart showing UNH’s denial rates at 32%.

Note that this data draws an incomplete picture.

First of all, it belongs to 2022 and is based solely on data gathered from denial and appeal filings to the Centers for Medicare and Medicaid Services.

WSJ came up with another dataset showing UNH denial rates for Medicare advantage was lower than that of CVS, Kaiser and Centene.

On top of all these, UNH was accused many times of billing fraud.

Yet, in all these investigations, either it was cleared or the DOJ saw no need to further the investigation because of inadequate evidence.

Now, keep in mind that UNH is a giant organization, and it’s not a secret that managers are given performance targets in such organizations.

This is why it’s always likely that some managers might have engaged in irregularities to reach the performance targets. I don’t think it could be attributed to the totality of the business, given that its business is subject to strict government surveillance, and nobody will benefit from a collapse caused by a systematic default.

Further, given the fact that thousands of employers and dozens of state governments are sticking with UNH for healthcare despite all these shows that there is some quality in their business that others can’t match.

⚠️ Regulatory Risk

UNH is a big administrator of government-funded healthcare plans such as Medicare and Medicaid.

This makes it subject to regulatory risks.

If the government steps back from healthcare spending, coverage for Medicaid and Medicare could shrink, negatively affecting the UNH business.

With Republicans running the House and the Presidency, this is a sheer risk. We are already seeing this with Trump’s “Big Beautiful Bill.”

Here is what it proposes:

A $625 billion slash to Medicaid over the next decade.
It introduces strict work requirements, mandating that able-bodied adults without children work at least 80 hours per month to qualify for Medicaid.

These changes could result in over 10 million people losing Medicaid coverage, and leave the cost of care for the uninsured to hospitals and insurance carriers.

Regardless of who’ll foot the bill initially, it won’t be pleasant for the whole industry as every business will try to pass the costs to the business below it in the value chain.

In sum, there are some substantial risks that can negatively affect the UNH’s business over the long term.

Why consider investment then?

As I explained, it’s these risks that make the potential return high, and I believe we also have some good reasons that UNH will keep thriving despite all the headwinds.

📝 Investment Thesis

My UnitedHealth investment thesis relies on three pillars that largely address the risks above.

1️⃣ UnitedHealth can pass costs to clients.

Let’s make this clear: UnitedHealth is currently the largest insurance carrier, the largest care network, and the largest pharmacy benefit manager.

This allows it to offer the lowest prices across the board most of the time.

This means one thing: When it increases the price to pass costs to clients, they won’t likely find another carrier at a cheaper price, as they’ll also be affected by the medical inflation.

The recent slowdown in growth apparently stems from its inability to come up with accurate forecasts as to costs. But this hasn’t been this way before. Take a look at this:

We see that UNH estimates were consistently above the real Medical Cost Ratio, meaning medical inflation and/or activity rates remained below its estimates.

This is an operational problem that UNH can address fairly easily by revising its estimates and bidding up for the next cycles.

Once the spread between the estimates and real ratios turns positive again, UNH will return to sustainable growth and won’t likely lose business as other providers will be more affected by the cost increases due to their smaller size.

2️⃣ The suspicions about compliance will clear up.

UnitedHealthcare serves more than 26 million people in the US and 50 million people worldwide.

It employs more than 400,000 people.

It’s now a systematically important company in my view.

As those negative headlines came up, people started to talk like they expected an Enron-like collapse of UNH.

I don’t think this will happen, or could happen in the current system.

For a few simple reasons:

The business of UNH cannot be absorbed easily by other providers.
Tens of millions of people will suffer in the process.
The healthcare system will be exposed to unprecedented stress.

These don’t mean that I am simply saying UNH is too big to fail, so it’ll be exonerated. No, this isn’t my message.

I simply believe that there could be some irregularities with the practices of some managers and executives, but I don’t believe they’ll prove systematic enough to require a punishment against UNH as an entity.

Note that UNH is regularly audited by the government for its business, investigated by both the DOJ and FTC for its dominance, and it has come out unscathed from all those processes so far.

I believe nothing substantial and systematic will come out from these investigations, and as those processes go nowhere, the media scrutiny over UNH will subside, and the stock will start trading on fundamentals rather than fear.

3️⃣ Healthcare spending will only increase.

US healthcare is already a $1.7 trillion market, and it’s estimated to reach $2.45 trillion in 2030.

Though regulatory risk is real, this isn’t a market that can be changed from the ground up by the government, nor can the government afford to step completely out of it.

It’s simply too big for the government to absorb if it wanted to disrupt the current model, given that the US government debt is already standing at $36 trillion. But the government can’t afford to completely step back from the healthcare spending, as the social costs of it would be too excessive and eventually lead to financial costs too.

What I think will happen is that the current model will be sustained for the foreseeable future in a series of modifications—republicans will trim from here and there every once in a while, whereas democrats will try to expand it once they get a chance.

As the US population gets older, healthcare spending will continue to increase, together with insurance costs.

Even if UnitedHealth grows at the market rate for the next 5 years, its revenues will nearly double.

This is not a possibility; if UnitedHealth is around, this will surely happen because of the market dynamics.

I think it’ll be around.

📊 Fundamental Analysis

➡️ Business Performance

You can say many things about UnitedHealth, but you can’t say the business isn’t performing.

It’s been performing incredibly well. Just take a look at this:

This is the largest healthcare company in the whole damn world and the largest component of Dow Jones Industrial Index. Yet, it managed to grow its top line by over 11% annually in the last 5 years.

Profits haven’t caught up, though… This validates our prior beliefs about the rising medical costs. Despite its robust top-line growth, it has had problems translating it to its bottom line.

This is another reason why we could be optimistic about its future.

This is clearly not a business that’s entering a permanent stagnation phase, but it’s having temporary problems in translating its growth to real income.

➡️ Financial Position

It takes two words: Rock solid.

Its equity pool is decisively larger than its total debt, and its annual EBITDA of $36 billion can easily pay all the debt within three years.

In terms of financial health, the shareholders don’t have anything to be concerned about. This business can weather the strongest storms.

This section doesn’t require any more comments. Crystal clear.

➡️ Profitability and Efficiency

Gross & Net Margins

This is where we can once again clearly see UNH’s problem:

As you see, its gross margin was pretty stable, just above 24% between 2021 and 2023. This coincides with the period where UNH estimates about medical inflation and medical loss ratio were above the actual rate.

However, after Q3 2023, the real costs increase went above its forecast and remained so until now. As you see, this its gross margin declined decisively since then.

The impact of this on the bottom line wasn’t very clear in 2024 as earnings took a hit because of the cyber attack-related expenditures and payments. However, we can now clearly see that net margin also took a 10% hit.

Though this is not the ideal picture we would like to see, it clearly tells us the problem, especially when it’s read together with the estimates and actual medical costs that we discussed above.

This is a reason to be hopeful; the problem is clear, and the business is capable of addressing it, as it has done these forecasts fairly accurately and priced its services accordingly so far.

Return on Equity (ROI)

This is another reason to be optimistic for UNH, it’s capital allocation is simply superb.

24% median ROI isn’t something that you would expect to see from a healthcare company, yet UNH has it.

Its excellence in vertical integration again plays an important role here.

It simply takes money from its insurance business, which doesn’t have many reinvestment opportunities and is a low-margin business, and allocates it elsewhere, such as Optum, which is a higher-margin business.

This high ROE is just another reason to be an optimist. It’s not slightly higher than average, it’s double of ROE of an average American company. This is insane for a healthcare company.

Going forward, I don’t see any reason why this ROE should suddenly collapse.

Given that shareholders’ return on investment tends to converge to the business’s long-term return on investment, I think we can easily expect an above-market return from here.

Overall, the business is performing, the balance sheet is strong, and its capital allocation is masterly.

But what really makes it irresistible in my eyes is the valuation.

📈 Valuation

This is the best part.

Normally, I advocate for a very simple valuation based on estimated revenue growth, final net margin, and exit multiples if the business is a predictable one, i.e, if it has a durable competitive advantage.

UnitedHealth definitely has such an advantage, yet I’ll run a DCF model to see a clearer picture, as it’s a controversial business.

I’ll remain very conservative and assume a mid-single-digit growth rate for the next decade, stable net margin, and a final ROIC of 15%.

Here is what we have:

As you see, even at a mid-single-digit revenue CAGR for the next decade and without any expansion in operating margin whatsoever, we get a fair value of $609.

Let’s say it’s $600 and assume a 30% margin of safety, you get an entry price of $420, at 50%, it would be $300.

The stock is trading at $295 now, you have more than 50% of margin of safety.

And this is assuming a mid-single-digit growth rate…

Yes, there are risks, but this is a big enough margin of safety to compensate for the risks.

This is why these situations are so attractive; if there weren’t all that negativity and risk, you wouldn’t get this business at $295, but here we are.

You can think all you want about the business, you can despise it personally, and hate it. I am not a fan of either industry or the business, either, but…

You should accept that this is an attractive investment proposition.

🏁 Conclusion

UnitedHealth was something most people saw as a “sure thing” a few months ago, and the same people see it as a thing to “surely avoid.”

They say the risks are obvious, and there are easier ways to make money in the market.

I don’t agree that, emphatically.

This line of reasoning misses the essence of investing—in investing, you are necessarily rewarded for carrying the risk, nothing else.

Sometimes risks are obvious, they are on the headlines, and sometimes not. When they aren’t obvious, people tend to underestimate risks.

Let me give you an example:

Imagine a business that grew revenue by 15% annually in the last decade and is trading at 35 times earnings.

Most people will look at it and say, “10% annual revenue growth is plausible for the next decade, so 35 times earnings isn’t that big of a price.”

Most people would favor this over UnitedHealth now, deeming it less risky.

Well, let me tell you something…

This equates to 12.4% revenue CAGR for 20 years.

Do you know how many companies achieve that?—It’s less than 1% of public companies.

What seemingly is a sure thing is actually an immense risk.

The point is that the risk is integral to an investment reward, and most people don’t even see it when they are embedded in the bet, but we all see it when it’s in the headlines.

Naturally, risks on the headlines come with a larger discount than embedded risks nobody sees. This is what’s expected from public markets.

Yet, investors are almost always better off taking those headlines risk as they are already reflected in the price and leave you with a better margin of safety.

You may have horrible views of UNH.

Personally, I don’t like traditional insurers generally. I have never had a policy with the UNH, and I don’t have any plans to get one, nor has anybody I remotely recognize ever been affiliated with UnitedHealth, none.

I am just a person trying to make money exploiting the inefficiencies in the market. If I think UNH unreasonably exceeds its fair value, I close the position, go ahead, never care about it again until it becomes an attractive bet again.

In the same vein, you may think anything of UNH, but we have to accept that this is an attractive bet now.

Betting on the dominant player in an industry that’ll go nowhere in the foreseeable future and being able to do it at a 50% margin of safety just makes business sense.