MW Why UnitedHealth? Buying the stock was actually a 'classic Buffett move.'

By Tomi Kilgore

Shares of some UnitedHealth peers got a bump, and they all look cheaper based on price relative to expected earnings

Why buying UnitedHealth's stock looked like a "classic Buffett move."

UnitedHealth Group Inc. had been pretty much abandoned by Wall Street, but it was the stock of the day on Friday after Warren Buffett said it was time to start buying into the health insurer.

Buffett is viewed by many as the best-ever value investor, given how successful he's been at moving toward a stock when the rest of Wall Street seems to be running away from it.

Read: Warren Buffett proves, once again, why he's the best.

And UnitedHealth $(UNH)$ investors had a number of reasons to run for the hills. The company and its peers have been hit by a surprise jump in medical costs at a time of increased government scrutiny into reimbursements, as well as government investigations into potential Medicare fraud and a bipartisan push to lower drug prices.

And just as investors wanted guidance the most, UnitedHealth withdrew its full-year financial outlook and said its chief executive was stepping down.

All that led to the stock plunging 40.4% during the second quarter - its worst quarterly performance since the first quarter of 2008.

Yet as UnitedHealth's stock declined, Buffett's Berkshire Hathaway Inc. $(BRK.B)$ $(BRK.A)$ stepped in and bought 5.04 million shares, a stake valued at $1.57 billion as of June 30's close.

"I think this is a classic Buffett move," said Mike O'Rourke, chief market strategist at JonesTrading and a noted Buffett watcher.

As O'Rourke put it, Buffett doesn't just buy stocks that are beaten down: "He likes high-quality companies that look like they are damaged goods."

The stock ran up 12% to close Friday at $304.01, enough to make it the S&P 500 index's SPX best performer on the day. It was also the stock's biggest one-day gain since it rallied 12.8% on March 24, 2020.

UnitedHealth is certainly seen as a "blue-chip" company, as it has been one of the 30 exclusive members of the Dow Jones Industrial Average DJIA for 13 years. UnitedHealth is the sixth Dow stock that Buffett owns.

Buffett also likes dividend payers - and at current prices, UnitedHealth shares sport a dividend yield of 2.91%, which compares with the implied yield for the S&P 500 of 1.21%.

O'Rourke said Buffett also likes to invest in businesses he understands, and Berkshire Hathaway is the parent of a number of insurance companies - including GEICO, United States Liability Insurance Group and Berkshire Hathaway Direct Insurance Co., as well as healthcare-liability insurers like MedPro Group and MLMIC Insurance Co.

So Buffett knows that while UnitedHealth may appear to have lost pricing power, he understands that pricing power will come back because "eventually, [insurance rates] sort themselves out," O'Rourke said.

While UnitedHealth reinstated guidance in July that was well below what Wall Street was expecting, the fact that it could put a number on its expectations shows that the company may be getting a handle on the situation. There's also likely some indicator that suggests the stock is undervalued based on historical and Buffett's proprietary measurements.

And as an analysis by MarketWatch's Phil van Doorn shows, UnitedHealth's price-to-earnings ratio - the stock price divided by the expected earnings per share - was at 90% of its five-year average.

It's not just UnitedHealth - there are signs that the overall healthcare sector XX:SP500.35, which is the worst performer of the S&P 500's 11 sectors this year, may be worth a look. A recent J.P. Morgan note said that while healthcare hasn't traded at a premium to the S&P 500 since the early 2000s, it "now trades at a substantial discount."

There's also reason to believe the healthcare business is booming. In the latest government jobs data, which showed that the U.S labor market was slowing down, almost all of the new jobs came from the healthcare industry. And that wasn't the only month that healthcare was an outlier.

Read: Healthcare companies are hiring. Is it time to look for growth stocks in this beaten-down sector?

Buffett's interest in UnitedHealth (other high-profile investors also bought the stock in the second quarter) has certainly sparked buying in the sector.

The Health Care Select Sector SPDR ETF XLV gained 1.7% on Friday, with healthcare being the S&P 500's best-performing sector on the day.

Among among UnitedHealth's managed-care peers, shares of Centene Corp. $(CNC)$ climbed 5.8%, Elevance Health Inc.'s stock (ELV) rose 4.8% and Molina Healthcare Inc. shares (MOH) advanced 4.9%.

Based on van Doorn's analysis, Centene's P/E ratio was at 89% of its five-year average, Elevance's was 88% and Molina's was at 56%. Elevance's dividend yield was at 2.21% at Friday's closing price, while Centene and Molina don't currently pay a dividend.

O'Rourke said for those who want to follow Buffett, keep in mind that he doesn't try to pick bottoms and there can still be negative headlines that send the stock lower.

He noted that the value of the UnitedHealth stake - it was 0.6% of the $257.52 billion value of Berkshire's equity holdings as of June 30 - looked more like Buffett was just "nibbling" on the stock, and he could very well have kept buying more once it fell further.

It did - the shares closed at a five-year low of $237.77 on Aug. 1. And while UnitedHealth's stock has run up 27.9% since then, it is still 2.6% below where it closed on June 30.

-Tomi Kilgore

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August 16, 2025 07:00 ET (11:00 GMT)

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