Cheap stocks often trade at low valuations for clear reasons and the majority of them don’t offer bargains. 

UnitedHealth (UNH) has managed to deliver strong profitability year after year but the market now expects that to change. 

CEO Andrew Witty’s sudden resignation and the withdrawal of 2025 guidance triggered a roughly 20% share drop, as investors worry about rising medical costs driven by adverse selection. 

To protect margins, the company may bid more conservatively on Medicare Advantage plans, which could cap or even shrink its membership growth.

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Last week, we discussed how not all cheap stocks are the same and some of them are cheap for a reason.

When using our EEA tool, it’s easy to spot companies that look cheap at first glance. But often there’s a solid reason behind an apparently low price.

The EEA starts by looking at a company’s current stock price.

From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

UnitedHealth (UNH) has been averaging around 40% Uniform return on assets ”ROA” since 2017.

However, the market now expects ROA to decline to around 30% over the next five years.

A closer look at what’s been happening with the company reveals significant reasons for this market view. 

It’s not just a simple case of being undervalued. There are specific business issues at play that are making investors cautious.

Recently, UnitedHealth announced some unexpected news that quickly impacted its stock price and market perception. 

The company’s CEO, Andrew Witty, resigned, and at the same time, the company pulled its financial forecast for 2025. 

The decision to withdraw guidance signals a period of uncertainty about future performance, which is a major concern for investors.

Following these announcements, the company’s stock dropped significantly, falling around 20% shortly after the news broke. 

The decision to withdraw the 2025 guidance stems mainly from two factors. 

First, there’s uncertainty about how long and how widespread the current increase in medical service use will be. This higher activity can impact the company’s costs and profitability. 

A key factor contributing to higher medical activity is what’s known as adverse selection in the insurance industry. 

This means that the policyholders enrolled in UnitedHealth’s plans, especially in Medicare Advantage, might be sicker or require more medical services than the company had planned for. 

When a health plan enrolls a higher proportion of members who need more care than anticipated, it leads to higher claims costs. 

This unexpected pattern of higher costs makes it difficult for the company to accurately predict future spending and profits.

Second, the leadership change at the CEO level, even with a familiar face returning, adds another layer of uncertainty.

Looking ahead, UnitedHealth’s plans to improve profitability in its Medicare Advantage business could affect how many members the company adds. 

To achieve better margins, the company might adjust its pricing strategy when bidding for Medicare Advantage plans in the coming months. 

This could potentially lead to flat or even negative growth in the number of Medicare Advantage members as the company focuses on managing its costs more effectively, given the current risk profile of its members.

The current valuation reflects the need for the company to navigate these challenges and provide a more predictable path forward.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research