Bristlemoon Global: UnitedHealth ($UNH) Investment Case
In their June 2025 quarterly report, Bristlemoon Global Fund details their new investment in UnitedHealth Group Inc. ($UNH), highlighting it as an opportunistic contrarian play following significant market dislocations. Bristlemoon established their position after UNH’s Q1 2025 earnings implosion and continued building as the stock weakened further. The fund views UNH as offering asymmetric risk/reward following a ~50% drawdown from recent highs, despite no longer viewing it as the defensive compounder many investors historically perceived it to be.
Investment Highlight: UnitedHealth Group Inc. ($UNH)
Business Overview
- Largest integrated healthcare services company in the United States
- Two distinct business segments: UnitedHealthcare (insurance) and Optum (cost containment)
- 50 million health insurance members with leadership position in Medicare Advantage (MA)
- Over 90,000 physicians serving ~20 million patients through OptumCare network
Market Position
- Industry leader in Medicare Advantage with nearly 10 million members
- Profitably gained MA market share over past decade (10% membership CAGR vs. 8% market growth)
- Largest provider of value-based care in the country with ~5 million VBC patients
- OptumHealth serves over 100 million consumers across various care settings
Performance Analysis
- Historical Strength:
- Previously regarded as defensive, quality compounder trading at premium to peers
- Strong MA market share gains enabled by risk adjustment and medical cost management capabilities
- Integrated model leveraging Optum’s cost containment with UHC’s insurance operations
- Current Challenges:
- Sharp increase in MA utilization at UHC (double expected levels)
- Inadequate risk adjustments for new MA VBC members at OptumHealth
- V28 risk adjustment model transition difficulties revealing potential upcoding issues
Crisis and Recovery Opportunity
The Perfect Storm (Q1-Q2 2025):
- Q1 2025: $1.5 billion operating income cut at UHC, EPS guidance downgraded
- May 2025: CEO Andrew Witty’s immediate resignation, replaced by Stephen Hemsley
- Company withdrew guidance citing worsening trends across adjacent populations
- DOJ criminal investigation reported for possible Medicare fraud
- Stock crashed >50% within one month
Financial Impact Assessment:
- Base case scenario: Additional $5 billion medical cost impact reducing EPS by ~$4/share
- Estimated 2025 EPS range: $22.0-$22.5 (vs. sellside consensus $21.9)
- 2026 EPS projection: $24.0-$25.0 range assuming ~10% growth recovery
Valuation and Upside Potential
Current Opportunity:
- Trading at significant discount following “premium” halo destruction
- Limited downside from current levels with 12x P/E viewed as resilient floor
- Target range: $290-$375 (12-15x 2026 EPS estimates)
- Provides portfolio diversification from factor concentration
Key Risks
Operational Concerns:
- Cultural issues prioritizing growth over prudent risk management
- Potential for further utilization deterioration across member populations
- Regulatory scrutiny and potential fraud investigation outcomes
- Management credibility following guidance withdrawals
Structural Challenges:
- Value-based care model incentivizing upcoding practices
- V28 risk adjustment model reducing inflated risk scores
- Increased regulatory oversight of Medicare Advantage program
Investment Rationale
Bristlemoon views UNH as an asymmetric opportunity where the market has overcorrected for operational challenges that should be addressable through 2026 plan design and pricing adjustments. While acknowledging the company is not the defensive compounder previously perceived, the fund believes current valuation adequately reflects near-term headwinds while offering attractive upside potential as operational issues stabilize and the business returns to growth trajectory.
The investment represents a contrarian bet on one of America’s largest healthcare companies at a significant valuation discount, with management changes potentially addressing the cultural issues that contributed to the current challenges.
