The Fortune 500 index ranks the 500 largest companies in the nation by revenue. Third on the list, trailing only Walmart and Amazon, is the nation’s largest health insurer, UnitedHealth. The company has had a tough go of it recently. Late last year, the CEO of the company’s UnitedHealth subsidiary was shot and killed just as he was entering the Hilton in Midtown to present at a conference. The company missed earnings and reduced guidance in April. On Tuesday, the CEO resigned “for personal reasons,” the company suspended guidance only a month after reducing it. The average of analysts’ 12-month price targets, over $640 per share earlier this year, has fallen more than 30% to $438. Then, after the close on Wednesday, the fire responsible for all that smoke was revealed when The Wall Street Journal reported a criminal investigation for possible Medicare fraud by the Department of Justice. The stock fell another 15% on Thursday, making it the worst-performing stock in the S & P 500 this year. When a company with a long and successful track record falters this severely, we have to ask ourselves questions to help establish whether the crisis is existential, persistent, prolonged or temporary: Is a secular shift in the industry threatening the business? Think Blockbuster Video before Netflix entered the picture—existential. Was there an unusually strong cycle that is unlikely to repeat? A “pig in a python” scenario — think Pfizer and Moderna with Covid vaccines — persistent/prolonged. Was the company fraudulently cooking the books? Think Enron or Worldcom —existential. Was the company creatively “massaging” its financials with creative accounting? Consider General Electric during the Jack Welch/Jeff Immelt era —persistent/prolonged. Is this a valuation issue where the price and the fundamentals are diverging? Think of Amazon in the late 1990s and early aughts. The stock price fell 95%, peak to trough, while revenues doubled–temporary. Is the company facing massive legal or regulatory problems that will significantly impair the business? Think tobacco, PG & E or Boeing — persistent/prolonged. More bad news is possible. The company insists it has done nothing wrong and said the DOJ had not notified it of the reported investigation. While executives insisted on a conference call Tuesday that they intend and expect to get back to prior margins and growth targets, it seems unlikely all this damage can be erased in the near term, and options prices, already elevated on hefty volume this week, are likely to rise even further now. Uncertainty caused a sharp drop in the stock price, a spike in options prices. A possible criminal investigation compound the hazards facing contrarians looking to pick up a once great company on the cheap. It’s always tricky to try and catch a falling knife. But as the two charts above reveal, 1) a 4% net income margin is a conservative baseline assumption, and 2) the only times UNH has traded much cheaper than it is right now were in the 1999/2000 time frame and during the great financial crisis. Could the stock fall to those multiples again or even lower? Of course, it shows how depressed the stock price is now. One way to take advantage of the depressed stock price combined with well-above-average options premiums is to perform a call/spread risk reversal, as follows. However, remember that this is a speculative long-term bet. The trade: Buy 1 June 27 $265 call Sell 1 June 27 $300 call Sell 1 June 27 $240 put Incidentally, if you own the stock and want a little kicker to upside without adding to downside risk, consider overlaying your long stock with zero-cost 1×2 call spreads. DISCLOSURES: All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
