UnitedHealth Group ($UNH)
We are downgrading UnitedHealth to a ‘Hold’ rating. If one has a position, it makes sense to hold the stock, as it is cheap at these levels (~4.5% FCF yield or ~16x-17x forward earnings). We recommend against new positions until the regulatory fog around CMS’s (Centers for Medicare and Medicaid Services) final 2027 rate announcement clears in April. We expect more regulatory headwinds (with the aim of reducing medical costs) for insurance companies in the coming years.
Key reasons for the stock dropping ~19% after the earnings were:
Flat Medicare Proposed Payments
The Trump administration has proposed nearly flat payment rates for Medicare Advantage in 2027 vs 2026. This regulatory squeeze, coupled with rising medical costs, is putting UNH in a margin crunch. Given the pace of medical insurance cost increases, if the government does not increase compensation to private Medicare plans in 2027, companies (like UNH) may pull back from the market, causing many people to lose coverage. We estimate that the final Medicare rate increase will be higher than the ~0% increase currently proposed.
Guidance for Revenue Degrowth in 2026
UNH is guiding to a ~2% YoY revenue drop in 2026 (and an 8% increase in earnings per share due to focus on improving profitability).
Membership Contraction
As part of a strategic reset (to exit structurally unprofitable business segments), UNH will serve 1.3 to 1.4 million fewer people in Medicare programs in 2026. This degrowth signals that the easy-growth era of private Medicare is probably over, and the company will focus on margin improvement.
AI to cut costs: Management aims to deliver ~$1B in savings through AI in 2026.
Valuation Support: We estimate UNH will generate ~$14B-$15B of free cash flow in 2026, and at an ~$300B EV, there is strong valuation support, with a ~4.5% FCF yield.
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Earnings Review: LVMH ($LVMUY)
We remain ‘Buy’ rated. Results are steady and signal a bottom for the company unless we have another round of tariffs. Geopolitical risks remain the most considerable overhang on the stock, and the US Supreme Court’s decision on tariffs will be the most crucial catalyst in the near term.
We value LVMH at ~$180 per share ($LVMUY) with a 2-year holding horizon and expect LVMH to compound revenue at ~5% CAGR and EBIT at an 8% CAGR till 2030. At the current price, the company trades at ~25x 2025 free cash flow, which is a fair price for a company of LVMH’s competitive advantage.
The results are steady, and we expect LVMH stock to perform well once trade and geopolitical tensions ease (we see this as a 6- to 12-month headwind).
Earnings Review: Intuitive Surgical ($ISRG)
We continue to hold ISRG in our portfolio and maintain a ‘HOLD’ rating on the stock. ISRG is the dominant player in medical robotics (with >60% market share), and we expect it to lead innovation in this market for years to come. Still, it is priced to perfection at ~65x current earnings.
Management gave conservative guidance (in our view) for 2026 with:
13%-15% procedure growth in 2026: Management cited tariffs, a difficult business environment in China, and budget constraints in Europe and Japan as headwinds to growth.
Effect of GLP-1 drugs: Management noted that the share of bariatric procedures is declining, but growth in general surgery is more than offsetting this decline.
ISRG is trading at ~55x-60x forward earnings and deserves the premium due to its dominant position in the robotic surgery market. Management appears conservative, and we expect ISRG to beat guidance throughout the year.
A tough start to the earnings season for our portfolio (especially for UNH and LVMH), but given the quality of the businesses we own, we believe it is only a matter of time before things turn around.
We will send the next earnings update and monthly portfolio together post Amazon’s earnings on the 5th of February.
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If you missed it, we covered our first-ever small-cap rebound opportunity a few days back. Our model suggests the company is undervalued and benefits from strong tailwinds from electrical grid upgrades and the massive AI-driven data center boom.
This work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research