Shares of health insurer UnitedHealth Group (UNH -1.53%) received a boost last week after investors learned that Warren Buffett's company, Berkshire Hathaway (BRK.A 1.28%) (BRK.B 1.35%), has invested in it. It has been a tumultuous year for UnitedHealth, which has seen its shares hit multi-year lows due to underwhelming quarterly results and a barrage of bad news.
Entering trading this week, UnitedHealth stock is still down 40% since the start of the year. However, the news of Berkshire buying shares of UnitedHealth may entice many other investors to follow suit. Could now be a good time to invest in the healthcare company?
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Why Berkshire's decision to invest in UnitedHealth isn't a big surprise
Back in June, I wrote an article explaining why Buffett might end up buying UnitedHealth Group. The insurance company is right within the billionaire investor's circle of competence and its strong position in the healthcare industry makes it the type of predictable, long-term investment that Buffett normally seeks. And especially with UnitedHealth stock in the midst of a sell-off this year, that may have simply sweetened the deal for Buffett, as it would have given him an excellent margin of safety.
According to Berkshire's most recent filing, which is as of June 30, it has bought approximately 5 million shares of UnitedHealth Group. It's a notable position for Berkshire, but it's not a huge one -- UnitedHealth accounts for just 0.5% of its total portfolio.
The company still faces a tough road ahead
The investment in UnitedHealth Group may appear to investors as a vote of confidence from Buffett in the struggling business, at a time when it desperately needs some positive news. Up until recently, it's just been a flurry of negative press.
Earlier this year, UnitedHealth's CEO Andrew Witty stepped down for personal reasons, and Stephen Hemsley, who once led the business, has taken over again. There have been reports of the Department of Justice looking into the health insurer's billing practices related to Medicare. And on top of it all, the company's earnings have fallen well short of analyst expectations this year due to rising expenses.
At a time when healthcare reform is on the radar for the government in an effort to reduce spending, there's simply no end to the question marks around UnitedHealth. And there's certainly no quick fix for the stock.
There are, however, reasons investors may still want to buy shares of UnitedHealth today. Currently, it's yielding around 3%, which is a rarity for the stock; it's typically a low-yielding dividend. And UnitedHealth is still profitable and over the trailing 12 months it has averaged a profit margin of just over 5%. While it has been rallying recently, it's still trading at a fairly low value, as its price-to-earnings ratio is just 13.
UnitedHealth's business isn't necessarily broken, but it is facing some uncertainty in the near term. And investors haven't appeared to be willing to hold on amid all these question marks. Berkshire taking a stake in the business may have changed those attitudes, at least for the time being, anyway. The question is, whether that will remain the case if in another quarter or two, UnitedHealth still shows that it isn't out of the woods and that a turnaround isn't imminent.
UnitedHealth can be a good buy, but investors shouldn't expect a quick fix
Investors should always consider doing their own analysis before buying a stock. Following someone else's moves can be a dangerous strategy. Buffett's reasons for investing in a company may differ from the reasons you may want to invest in it.
I do believe UnitedHealth's stock will recover and that it can be a good investment in the long term, but I also don't think it'll be a quick fix for the company to reduce costs and win back risk-averse investors. And while Berkshire investing in the company has sparked some enthusiasm behind UnitedHealth stock, that itself is not a reason to invest. It certainly doesn't mean that the stock is destined to continue rising in the near term.
UnitedHealth is a stock that's going to be suitable primarily for long-term investors. It may take a while before the business is able to prove that it's on the right track and a safe buy again. If you're willing to be patient, then it may be worth adding the stock to your portfolio. But don't simply invest in UnitedHealth because Buffett did.
