Full disclosure, fellow investors: I'm as perplexed by the health insurance reform "conversation" as the next sentient citizen. Year in and year out, the cost of health care out-inflates all comers, and yet the beat goes on. And on and on and on ...
So too does the beating we all take in the form of higher insurance premiums. The math only gets uglier the farther out you look. The U.S. will spend trillions on health care this year, after all, and over the past 10 years, health-care costs have increased at four times the rate of inflation.
Here's a shocker
Dyed-in-the-wool cheapskate that I am, I too have an overheated opinion about what should happen on the health-care front, but I'll spare you yet another one of those and cut to the chase. Plain and simple, the stock to buy if Obamacare looks destined to lose is UnitedHealth Group.
For my money, it's the insurance industry's best operator -- though, to be sure, it's struggled of late. The Minnesota-based concern has posted anemic earnings over the last three years, for example, even as its industry average rose at a double-digit clip. More bad news: UnitedHealth's debt profile goes the other way, with the company's debt/capital ratio surpassing the level of leverage sported by close competitors such as Aetna and WellPoint.
So what's UnitedHealth got that those companies don't?
Just this: A valuation profile that prices the company well below even a painstakingly conservative estimate of fair value. The company is cheaper than the broader market (as measured by the S&P 500), and it's trading at a healthy discount relative to peers in terms of price-to-cash flow, too.
About that cash flow ... UnitedHealth delivered roughly $3.5 billion of the stuff in fiscal 2008. And while that represented a sharp reduction relative to frothy fiscal years in 2006 and 2007, the company is on the comeback trail, posting almost $5.3 billion in FCF over last 12 months.
The upshot? If Obamacare fails -- which seems increasingly likely -- I suspect current purchases of UnitedHealth will turn out to be Foolishly wise investments in a great company in an industry poised to profit once the uncertainty discount currently afflicting health care fades -- and with it, perhaps, any chance of significant near-term cost controls. The market absolutely hates mystery, after all, a dynamic that can afflict even "safe haven" sectors like health care.
All of which leads to this question: Why not just bypass the uncertainty for now and go where the growth already is?
Relative to industry peers, for example, growth-oriented market leaders such as burrito concern Chipotle Mexican Grill (NYSE: CMG ) and pharmaceutical giant Abbott Laboratories (NYSE: ABT ) have delivered shoot-out-the-lights net-margin and return-on-equity figures over the last 12 turbulent months. So too have Amazon.com (Nasdaq: AMZN ) and Gilead Sciences (Nasdaq: GILD ) , another pair of go-go aces.
What's more, if analysts are even just directionally accurate, there's more growth where that came from. That fantastic four are all expected to increase earnings at a double-digit clip over the next five years.
Pay for the privilege
Priced at nearly 14 times its average cash flow over the last three years, NetApp is a clear illustration of the problem that I think afflicts all the above: There's not a bargain among 'em right now. Golden growth has been priced into their shares.
Not so much for UnitedHealth, though. It's a great company in a regulatory risky business that's currently trading for a proverbial song. If the legislative process evolves toward toothless reform -- complete with an expanded base of customers who are required to purchase health insurance, no less -- I suspect its stock price will shine.
The Foolish bottom line
One stock, of course, doesn't add up to Foolishly diversified sector exposure, but not to worry. While UnitedHealth is indeed a three-time recommendation of the Fool's Inside Value, the service has tapped nine other health-care concerns. Its current list of Best Buys Now, moreover, features one non-health care company trading at a discount of more than 45% to the team's conservative estimate of its intrinsic value.
A sneak peek at that company -- and every other recommendation the service has made, each of which comes with a recommended "buy below" price -- is completely free for the clicking. Just click right here to learn more.
Shannon Zimmerman runs point on the Fool's Duke Street and Ready Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast n' furious radio show. Shannon doesn't own any of the stocks mentioned UnitedHealth Group is a Motley Fool Stock Advisor pick. The Fool owns shares of UnitedHealth Group. You can check out the Fool's strict disclosure policy right here.