UnitedHealth Group Stock Is Near 5-Year Lows: Is It a Bargain Buy?

UnitedHealth Group (NYSE: UNH) is one of the biggest health insurers in the U.S. It plays a critical role in the healthcare industry, and for years, it has been a sound stock to invest in.

This year, however, has raised significant questions about just how safe the stock really is. Since January, UnitedHealth stock has lost more than 40% of its value. Those kinds of swings may be common for risky meme stocks, but not one of the most reliable health insurers in the world.

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Is UnitedHealth truly a company that's in deep trouble and a stock you should steer clear of, or is the market overreacting? Could this be one heck of a cheap buy right now?

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No shortage of adversity facing the business

One of the biggest concerns undoubtedly for investors right now is that the healthcare company is reportedly in the midst of a criminal investigation. According to the Wall Street Journal, investigators are looking at whether the company defrauded the federal Medicare program. Meanwhile, The Guardian reported that UnitedHealth allegedly paid nursing homes bonuses for reducing the number of hospital transfers for residents. Doing so would reduce costs for the business but, at the same time, potentially jeopardize the health of those residents. While these allegations haven't been proven, they do appear to be weighing heavily on the business.

And what doesn't help matters is that a few weeks ago, UnitedHealth Chief Executive Officer Andrew Witty said that he would be stepping down from his position, stating that he was doing so simply for "personal reasons." Investors may be seeing this as confirmation that the allegations are indeed true and that the business is in deep trouble. Taking over will be Stephen Hemsley, who previously served as the company's CEO.

But another reason could be the company's recent financial performance, which has been underwhelming. In April, the company reported quarterly earnings numbers that didn't meet expectations, and the company also slashed its forecast for the year amid rising costs. For the full year, it now expects adjusted earnings per share to fall within a range of $26 to $26.5 -- a sharp reduction from its earlier projection of $29.5 to $30.

UnitedHealth stock fell after those results, with reports of criminal wrongdoing sending its shares tumbling even further.

Can UnitedHealth turn things around?

If there's a criminal probe into the company's practices, that can potentially be the most alarming issue for investors to worry about. It can affect how the company operates and result in fines. In the longer run, it may even lead to more oversight, resulting in added complexity and increased costs for the business, potentially exacerbating the problems UnitedHealth is facing today.

A change in CEO may have been inevitable at this stage. Whether Witty was feeling pressure, was pushed out, or left for some other reason isn't known, but a change in management may be the least surprising result out of all this controversy.

But now, let's turn to the positive. UnitedHealth plays an important role in the healthcare industry, serving more than 52 million people. And although the company's financials may not be impressing investors of late, they are still strong. In the past four quarters, UnitedHealth reported $22 billion in net income on revenue totaling $410 billion. And during that stretch, its free cash flow came in at just under $25 billion. The company's robust earnings and cash flow put it in a good position to weather the current storm, as daunting as it may appear right now.

Although it may not be an easy path forward, between its strong numbers, its leading position in the health insurance industry, and its previous CEO coming back on board, I'm optimistic that UnitedHealth can recover from the challenges that lay ahead.

Should you buy UnitedHealth Group stock?

UnitedHealth stock is down big this year, and it hasn't been trading at these prices since mid-2020. The market has punished the stock not only for poor numbers but also for the uncertainty that lies ahead, not only with what may happen due to the reported criminal probe but also for the potential for broader healthcare reform.

How this will all play out is a big question mark, but that certainly doesn't mean the business is doomed. While I wouldn't want to understate the seriousness of UnitedHealth's troubles, investors appear to already be bracing for the worst, and there may be a potential overreaction to these developments, especially with all this bad news coming at the same time.

At 12 times earnings, UnitedHealth stock trades at a fairly low price-to-earnings (P/E) ratio. That is well below its five-year average of 25. Given the significant discount, I believe there's a good margin of safety here, and the stock has fallen enough that it may be worth taking a chance on. This isn't a short-term trade by any stretch, but if you're willing to be patient, this could be a good contrarian investment to consider today.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.