In its financial results for the second quarter, UnitedHealth Group Inc. (NYSE:UNH) managed to beat estimates for both the top and bottom lines. The $116.72 billion healthcare company reported EPS of $1.64 and revenues of $36.26 billion. Analysts were expecting EPS of $1.59 and revenues of $35.66 billion going into the second quarter. Net margin improved slightly, by 0.1 percentage point to 4.4% on a year-over-year basis. The largest increase in revenues in percentage terms was seen from the Community & State segment, a 25% rise to $7.21 billion, while the Employer & Individual segment contributed the most, with $11.85 billion, which also marked a hefty 10.4% rise compared to the same quarter last year. In light of the Catarman Corporation combination, the company has also increased its forecast for 2015. Revenues were hiked by $11 billion to $154 billion and EPS is now expected to fall between $6.25 and $6.35, up from a $6.15 to $6.30 range provided earlier. Nonetheless, shares have dipped by 1.68% in morning trading today following the earnings release.
Smart money showed considerable enthusiasm in UnitedHealth Group Inc. (NYSE:UNH) during the first trimester. The number of hedge funds invested in the company among those that we track increased to 58, with an aggregate investment of $2.90 billion at the end of March, compared to 49 firms with $2.56 billion invested at the end of the previous quarter. Although it should be noted that the health care company’s stock price appreciated by more than 16% during this period, which accounted for the gains in aggregate holdings. So though nine additional funds entered the stock during the first quarter, their holdings were minimal, or offset by share sales from existing owners.
Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 139% over the last 34 months and outperformed the S&P 500 Index by 80 percentage points (see the details here).
We also track insider activity as it often provides crucial insights into the company’s future prospects. However, insider purchases are a much more powerful indicator than insider sales, and while UnitedHealth Group Inc. (NYSE:UNH) hasn’t seen any of the former activity this year, significant insider sales include those made by Director Gail Wilensky to the tune of 41,000 shares, and by Chief Accounting Officer Eric Rangen, who has disposed of some 17,000 shares of UnitedHealth this year.
Let us analyse the hedge fund activity surrounding the company in a little more detail.
How have hedgies been trading UnitedHealth Group Inc. (NYSE:UNH)?
According to hedge fund experts at Insider Monkey, Boykin Curry‘s Eagle Capital Management had the number one position in UnitedHealth Group Inc. (NYSE:UNH), worth close to $1.29 billion, corresponding to 4.8% of its total 13F portfolio. The second-most bullish hedge fund manager is Cliff Asness of AQR Capital Management, with a $235.2 million position; 0.5% of his fund’s 13F portfolio is allocated to the stock. Some other hedge funds with similar optimism encompass Phill Gross and Robert Atchinson’s Adage Capital Management, ClearBridge, managed by Sam Peters, and John Shapiro‘s Chieftain Capital.
As one would reasonably expect, key hedge funds have been driving this bullishness. Point72 Asset Management, managed by Steve Cohen, created the most valuable position in UnitedHealth Group Inc. (NYSE:UNH). Point72 Asset Management had $26 million invested in the company at the end of the first trimester. Brian Taylor’s Pine River Capital Management also made a $17 million investment in the stock during the same quarter. The following funds were also among the new United Health investors: Eric Sprott’s Sprott Asset Management, and Sahm Adrangi’s Kerrisdale Capital.
We believe that strong hedge fund sentiment and an earnings surprise, combined with improved guidance make the stock a buy on its dip today.
Disclosure: None
