UnitedHealth: Headwinds For Healthcare Abating

Summary:

• The headwinds that were present during the first half of 2023 appear to be abating, leaving us with a clearer path forward for UNH and its peers.
• Follow along as we take a look at the current fundamentals.
• Also, we share specific price targets overhead and what this next high may imply for the stock.

By Levi, produced with Avi Gilburt

There’s currently a clear setup for UnitedHealth (NYSE:UNH) to work higher into the second half of 2023. First, we will look at the fundamental picture via graphs and commentary with Lyn Alden. Then, the technical view with Zac Mannes and Garrett Patten. Also, this next high, if/when seen in UNH, may prove to be significant for some time. Let’s dive right in.

The Fundamentals

Here are recent comments from Lyn accompanied by graphs that help us visualize what’s going on with UNH under the hood.

“Healthcare companies have faced headwinds during the first half of 2023, as risk-on conditions materialized and sentiment dimmed on more defensive sectors including healthcare. In addition, for health insurers, the market had significant concerns that as patients finally got around to doing procedures that they delayed during the pandemic years, it would negatively impact insurer margins.

Overall, I think the second half of the year looks better for healthcare stocks broadly. Valuations have come down, and earnings reports have been coming out that demonstrate that although margins are a bit pressured, the overall numbers are fine thanks to overall growth.

For UNH specifically, it has been a top performer within its industry but this comes with a valuation premium. Their peers such as Humana (HUM), Cigna (CI), and CVS Health (CVS) for example all come at much lower valuations, albeit with a bit more company risk. Overall, UNH is not necessarily my first choice in the industry or the sector, but I do think that the sector as a whole offers a compelling risk/reward setup.”

The Technicals – A Measure Of Sentiment

When we’re talking technicals, our main analysis tool is Elliott Wave Theory. This theory obviously must be correctly applied. Before delving just a bit deeper into why we use this tool, let’s discuss the current setup and where it next projects price to reach for UNH.

Both of our lead technical analysts show UNH as likely already striking an important low a few weeks ago. As well, they’re projecting the next rally phase to take price to the $620 – $640 level. What differs is what degree that will be in the larger structure. More on this in just a bit.

From this current level, price should now hold the low struck at $447 on July 13. In fact, if the initial rally has already begun, then standard support is in the $470 – $490 region. So, we should see price consolidate at this area or higher and then take out the prior high above $515.

Risk: Should price instead break back below $447 we would expect further corrective action and our near term buy setup would invalidate.

A Question Of Degree

Above we mention the matter of degree for the larger structure on the UNH chart. As you can see, Zac shows the next potential high as either a Cycle III top or a Cycle I. Garrett has his primary scenario as a Cycle I high. The main difference would be the possible depth of the anticipated pullback to follow. A typical pullback for a wave IV would be 38% of the distance of wave III in price. A standard pullback for a wave II could be 38% to 62% of the prior wave I.

In either instance, we would use the structure of the pullback to tell us which path would be the most likely. As well, ultimately it would be sentiment that would turn before the fundamentals. When we discuss sentiment, what exactly are we talking about?

Sentiment – The True Mover Of Markets

Have you ever seen the dictionary definition of the word ‘sentiment’? It accurately describes what we are discussing here.

Sentiment: An attitude, thought, or judgment prompted by feeling.

(emphasis added)

Now tell me if you have observed this in your investing/trading experience. A stock you’re following, or the market in general, trades much above or below what is considered a normal valuation. Who hasn’t seen that at some time? That’s sentiment in action before your very eyes.

Yes, fundamentals are important and at some moment in time they will matter. What’s more, the smaller a market capitalization of the stock observed, the more fundamentals will weigh on price. The opposite also is true. Sentiment works on a continuum.

So, how do we use these “feelings” to our benefit rather than to our detriment? Our job as market participants is to join in the movement of price and to be on the right side of that more often than not. Seems simple and straightforward, does it not? However, when greed and fear overtake a participant, then said person is no longer an observer of the sentiment in the marketplace, rather they are now a participant in the sentiment itself. Emotions have now clouded their judgment and subjectivity will likely soon exit stage right.

The trader/investor needs a specific structure to measure sentiment and to indicate what’s the most likely path going forward. We view the markets and the stocks that make them up from a probabilistic vantage point. This means that we seek to identify what is the highest probability outcome and then follow this as our primary path. However, we also will outline an alternative path should our primary fail.

Avi Gilburt has compared this many times to a general that makes a battle plan before ever engaging the enemy. It’s simply sound strategy to search out likely outcomes and be prepared ahead of time.

In the specific case of UNH, we like the sector as a whole. As well, the structure of price seems to line up with favorable fundamentals that point to a new high to be seen soon.

There are many ways to analyze and track stocks and the market they form. Some are more consistent than others. For us, this method has proved the most reliable and keeps us on the right side of the trade much more often than not. Nothing is perfect in this world, but for those looking to open their eyes to a new universe of trading and investing, why not consider studying this further? It may just be one of the most illuminating projects you undertake.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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