Daily Stock Pick: October 28th, 2022

Stocks were mixed heading into today’s session as the market digested disappointing big tech earnings. Still, the major indices remain in positive territory for the week, with the Dow on pace for its fourth consecutive positive week. “Investors want clarity and certainty. Right now, we still have a lot of uncertainty on multiple levels,” said Adam Sarhan, CEO of 50 Park Investments. With that, many investors are seeking companies from defensive sectors that have a reputation for being resilient during times of economic weakness.   

Traditionally one of the most stable and recession-resistant sectors, everyone needs healthcare at some point regardless of income status. “The defensive aspects of the sector, while not fully appreciated at times over the past few years, is beginning to kick-in in a rather meaningful way,” commented Jared Holz, a healthcare strategist at Oppenheimer.   

Today we’re focusing on a name offering defensive growth from the desirable healthcare sector with a bevy of built-in advantages over peers from the group.   

A name offering defensive growth from the desirable sector currently is UnitedHealth Group (UNH). As the most significant health insurance company by market cap and market share, UNH’s size gives it built-in advantages over peers from the group.   

Despite the market slowdown this year, UNH’s share price is up more than 8%, outperforming its peers and the broader market. The Health Care Select Sector SPDR Fund (XLV) is down nearly 6% YTD, while the S&P 500 has shed more than 20%.  

UnitedHealth reported double-digit revenue growth for 2021. Full-year revenue was listed at $287.6 billion, up 11.8% year over year. Full-year EPS increased from $16.03 in 2020 to $18.08. The company expects annual 2022 revenue between $317 and $320 billion, the median of which implies an 11% upside year over year.   UNH forecasts 2022 EPS of $20.20 to $20.50.

Momentum should be supported in the coming years thanks to UNH’s strong market position and attractive core business. Its international business expansion provides substantial diversification benefits and shields against the impact of tightening U.S. regulations while allowing the Dow giant to tap into the $8.3 trillion spent annually on global healthcare.

UnitedHealth has a solid history of rewarding investors with a steady paycheck. The company went to a quarterly dividend in 2010 and, since then, has increased its dividend every year. That includes a 16% bump last year to $1.45 a share, which works out to a yield of 1.10% at its current price. UNH’s payout has increased 31% over the past five years, and the stock has a 5-year annualized dividend growth rate of 17.18%. 

“It’s a company that grows earnings in a defensive way through cycles – low double-digit to mid-teens rate. Even a company like that is impacted by a recession but certainly far less on a relative basis than deep cyclical, for example,” said Brian Arcese, an outperforming fund manager at Foord Asset Management.

The stock looks like a value at about 27 times earnings, compared to the healthcare industry, where the average P/E is around 37. Anyone looking to beef up their defensive line with healthcare would do well to consider UNH now.