Thursday, June 28, 2012

UNH: Thanks, Supreme Court!

UnitedHealth Group Inc. (UNH) is the largest health-insurance provider in the United States. The Minnetonka, Minnesota company serves 75 million people.

The U.S. Supreme Court today announced an opinion upholding President Obama's reform of the American health-care system, including a requirement that most Americans buy health insurance coverage.

I want to analyze one of the major insurance providers as a baseline for reference in later analyses. I'm curious how these companies will fare under the Affordable Care Act, which expands their potential markets a great deal.

Truth be told, in my opinion, UnitedHealth should be sending a big thank-you letter to the five justices who voted to uphold the law. I think the reforms will prove to be very profitable for the health-insurance companies.

The UNH chart, however, isn't really showing the love.

On the chart, UNH has been in a pattern that can be interpreted as sideways with a failed breakout, or, alternatively, as a very shallow uptrend.

The pattern began with a rise on March 26 from $53.86, hit a high of $59.61 on April 3 and another high of $59.71 on April 20, before falling to $53.78 and then rising again to a pattern high of $60.75 on June 19. It has since retraced and is now trading at around $58.60.

So while it's true that each high since late March has been a higher high, none has been much of a gain over one before, and although the one swing low was a higher low, it wasn't higher by much.

If this is an uptrend, it is a fairly sorry specimen of the breed.

UNH was hit hard by the recession, dropping to $14.51. The price has only recently exceeded the immediate pre-recession high of $59.46 at the end of 2007, although it has yet to match the all-time high of $64.61 attained in late 2005.

Very short-term traders in UNH did not take the Supreme Court decision calmly. The price was at $59.02 immediately before the announcement, and in the ensuing 10 minutes swung between a low of $55.34 and a high of $60.50, a 9% range and about four times the average daily trading range.

The move was of no significance, although it was amusing to watch.

UnitedHealth reports return on equity of 19%, just below my definition of the growth stock. But that achievement is marred by a long-term debt level that is higher than I like, amounting to 45% of equity.

Earnings levels have been fairly stable from 2011 onward. Each quarter has been profitable, and all have shown upside earnings surprises.

Institutions own 87% of shares, yet the price is cheap. It takes just 59 cents in shares to contorl a dollar in sales.

UnitedHealth's analyst enthusiasm index is 53%, up from 47% a month ago. The index gives positive weight to Strong Buy recommendation, ignores Buys, and gives negative weight to Holds, Sells and Strong Sells.

UNH on average trades 7.3 million shares a day, sufficient to support a good selection of option strike prices with very high open interest and narrow bid/ask spreads.

Implied volatility stands at 31%, just below the midpoint, after having fallen dramatically in one day from 42%. Options are pricing in confidence that 68.2% of trades will fall between $56.28 and $61.30 over the next month, for a gain or loss of 4%.

Option volume is running double the five-day moving average for calls and nearly triple the MA5 for puts. There is a lot of speculation in UNH at this point. I don't normally seek out stories behind technical formations, but I wonder how much of today's options action is tied solely to the Supreme Court decision and is therefore extremely transient.

UNH is trading in the upper half of the fair price range, which encompasses 68.2% of trades surrounding the most traded price, $58.52. The range extends from $57.64 to $59.58.

The company next publishes earnings on July 19. The stock goes ex-dividend in September for a quarterly payout yielding 1.45% annualized.

Decision for my account: I've owned a diagonal spread on UNH since mid-May, an appropriate play for a stock that's going nowhere but with a slight upward bias. The spread is hedged by design, so I don't have a stop/loss point.

If I were putting on a bull position now, I would want to see a decisive break above $60.75. 

Wednesday and today have been volatile intraday but in each case has closed just below the opening price. They are, at this writing (2 p.m. Eastern) very near to being spinning tops on the candlestick chart, a hesitation pattern.

Even very near term, then, there is no trend, just a balanced battle between bulls and bears.

I considered entry upon a fall to and reversal from the level of the nearest low (excluding today's daytrader craziness), which is $57.23. But I've rejected that. The price is at the upper levels of the trading range since March, and I would want to see an uptrend established before opening a bull position.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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