United Health Group Stock Drops 50% and Moody’s Lowers US Credit Rating

Welcome back everyone. Today on the Joseph Carlson Show, as our portfolios are reaching all new highs, we're always looking for new companies that are potentially good investments. Quality compounding machines that have sold off because of irrational fare. Well one company that's long been called a high quality company in that compounder basket that's going through a dramatically troubling time is United Health Group. The stock is up 5.6% today, but it still trades at a price of $308. That is down a staggering 40% year to date. It's market cap nearly cut in half after recent events. The valuation of the company is trading at an all time low, with a 12 Ford PE ratio, a nearly 9% free cash flow yield, and this is a company that typically generates enormous amounts of money, doing over $24 billion of free cash flow in the trailing 12 months. This monumental sell off in United Health Care has split investors, many of them buying the dip hoping for a quick recovery, and other investors looking from the sidelines wanting to avoid this stock completely because of the risks inherent with the business. United Health Group after all is likely one of the most hated companies in the market by the public and their own customers, but it's also a company deeply embedded in the US healthcare system with many customers relying on their services. So what's caused the massive sell off in this company, and is it a good investment? We'll be discussing in this episode. We also had the big news over the weekend, that Moody's downgraded the US government debt from its AAA credit rating. Scott Besant, the treasury secretary, has responded to this downgrade by saying that Moody's is a quote, lagging indicator for US financial health, and doesn't fully reflect the changes being made. We'll be going over this downgrade, seeing if it's actually meaningful, or if in fact Moody's and S&P Global are simply lagging indicators. We also have Tom Lee's input on this subject as well, you'll be shocked to know that his advice right now is to continue buying. We also have the CEO of Take-Two Interactive, the developer of Grand Theft Auto 6, explaining why they're delaying the game, and how what they're building is one of the biggest accomplishments ever done. And then finally, we get to see what happens when a police officer pulls over a car that has no driver. So as always, we have a lot to get into. Let's go ahead and jump in. Now we start things off today with one of the biggest news stories of the past week, which is the epic fall of UnitedHealthcare. Breaking news, UnitedHealth says Andrew Whitty, stepping down as CEO, saying for personal reasons, Board Chairman Stephen Hemsley is taking over as CEO, and will remain chairman. Whitty will stay on as a senior advisor. The company has suspended its 2025 outlook, saying medical expenditures are now expected to be higher than it had anticipated. UnitedHealth says it doesn't expect a return to growth in 2026. This is the type of report that many of us heard on UnitedHealthcare. They reported earnings, and the stock dropped dramatically, 28% in a single day. The CEO abruptly either quit his job or was fired, and the company lowered their earnings estimates dramatically. On top of that, the company noted that in terms of forecast, it won't be growing this year. And as you heard it briefly mentioned here, all of this chaos was a result of them underestimating medical costs. The damage that's been done to UnitedHealthcare is dramatic. The stock is down by 41% over the trailing one year. From its peak just recently, it was trading at almost $600 per share, and now it trades at $311, going down nearly 50% from its peak. Whenever a stock drops 50% in only a matter of months, there has to be a rapid degradation of the narrative. That's the overarching theme. Investors need a sour on the company, pessimism needs to abound. In the case of UnitedHealth Group, this stock has had multiple facets to the degrading of its narrative, one of them being the abrupt departure of the CEO. It's never a good sign when a CEO leaves without any prior warning. Usually with large companies like this, there's a transition period, a period of passing the baton from one leader to the next. That didn't happen in this case. The other part of this is the earnings revision. Investors like companies where margins are increasing over time. That's one of the biggest indicators to a stock price going up. Of course, there are exceptions to this rule, but overwhelmingly, when margins are going up for a company, the stock price will usually increase. In the case of UnitedHealth Group, this company revised its earnings per share projection from $30 per share, which is what it was the beginning of the year, to now $25 per share, going down around 17% in a single quarter. So how did we get here? How did all this unravel for UnitedHealth Group? Well, it's like Joe Kernan on CNBC said, they simply underestimated their health expenses. To be more specific, this entire event revolves around what's called the Medicare Advantage Plan. The Medicare Advantage Plans are designed by private companies, ones like UnitedHealth Group or Elevance or Humana, these different health insurers, and they're specifically targeting typically elderly people, people above 65 years old that have Medicaid. These are insurance plans for those groups of people. Now, the way that this works is important. Each year, the insurers submit bids to a government agency called the Center for Medicare and Medicaid Services, CMS, estimating the coverage of a typical Medicare Advantage member. Now, these bids are based on actuary models. They factor in things like medical costs, utilization trends, regulatory changes, bonus payments, their star rating, and so on. So they factor in all this different information, but the important thing here is for investors to know that if your company gets this wrong, if UnitedHealth Group gives the wrong estimates, it's not the customer that eats the cost, it's the company. So for example, if they were to bid far too low for the Medicare Advantage Plans in order to get a lot of business, they will eat the difference between the actual costs and their bid. Over the past couple of years, all these different insurance companies like UnitedHealth Group, Humana, Elevent, so on, they are all trying to gain customers by bidding for these Medicare Advantage Plans, aggressively competing with each other, offering lower premiums to customers, and they're doing this to try to gain market share. Well, the way that they were pricing this was based on historical data. There's always a couple year delay to where they get what people are actually doing and what their premiums actually are. A lot of what the pricing was based on years ago was the COVID years, the pandemic. During the COVID years, the pandemic, seniors avoided hospitals, surgeries, and preventative care. They did so because elderly people didn't want to go to a hospital and potentially contract a dangerous disease that could kill them. So a lot of them just did not go to hospitals. This artificially lowered the amount of claims being done by the elderly population during the COVID years, and the insurers are making a lot of money in the process. These elderly people were paying the premiums and they weren't utilizing health care. Now, at the same time, the insurers believed that this was partially permanent, that elderly people would start to come back and utilize different health care services, but they may do so gradually, slowly over time, and that was far from what happened. Instead, seniors returned in full force in 2023, 2024, and in 2025. Many came back even sicker after delaying care. They delayed surgeries and care and treatment, and they came with pent-up demand. So instead of them coming back gradually over time, or the drop in utilization being partially permanent, it was actually the opposite effect. They had pent-up demand. Now again, early on, these Medicare Advantage plans were very profitable because the premiums were priced to where they were having low utilization. Insurers assumed that they could keep the margin stable or even grow this over time. That confidence led to aggressive pricing. In 2023 and 2022, these companies were bidding for more and more customers, offering lower and lower premiums, trying to gain market share from each other. This created a race to the bottom. And now we get to current day, where we have a flood of patients coming in, utilizing health care far above expectations, causing these companies to eat the cost in between. And we've seen signs of this. The problem has been reminiscent in multiple health care companies up until UnitedHealth grew. The first one to note this problem and create a red flag that the Medicare Advantage plans were grossly underpriced was Humana. They've acknowledged this mistake months ago, taking the financial hit and lowering their guidance. Then we have Elevance Health, which held up a bit better initially, but eventually also had to admit the same problem. And then we had the big one, UnitedHealth Group, waiting the longest. They didn't want to acknowledge that there was any issues. They tried to sweep this one under the rug, but it was inevitable. UnitedHealth Group has a huge amount of exposure to these plans, with over 9.4 million people on Medicare Advantage plans. So they were the last to admit it. And in many cases, investors thought that they could handle it better, that they had a stronger network, they have a bigger mix shift of products and different things that they can use to make the hit not so bad. But it turns out, it was still pretty bad for UnitedHealth Group. So they priced millions of Medicare Advantage plans for way under what they needed to be priced and now they have to pay the difference, causing the CEO to abruptly leave, the company to pull guidance, and the earnings to be revised dramatically lower. In terms of where the stock stands right now, even as much of an issue as this is, this is not going to destroy the company. In fact, UnitedHealth Group will recover from these problems. And ultimately, as it stands right now, we have no evidence to believe that any of these companies are near bankruptcy or financial ruin. This is, after all, only one part of UnitedHealth Group's coverage. They have many patients on many different plans outside of these Medicare Advantage plans. It's very difficult for the market to accurately price companies when they've dropped 50% in only a matter of weeks. In many cases, investors overdo the sell-off. I believe that this sell-off is overdone. After all, even as dramatic as the events may seem, with the departure of the CEO and the company's earnings going down, this isn't a dire situation for the company. They will withstand this, and the company will continue to grow earnings in the long-term future. This dip, in and of itself, is temporary by nature. I view the stock as meaningfully undervalued today, and I think that investors that buy into it will likely do well over the next couple of years. It's not one that I'm personally attracted to qualitatively. I try to avoid insurance companies in general, but I don't blame any investor jumping into this one now. Now moving on, we get to the other big story over the weekend, which was that Moody's decided to downgrade the US government's debt. They said more specifically that the expanding budget deficit means that the US government borrowing will rise at an accelerated rate, pushing interest rates up over the long term. They also looked at the budget proposals, and said on Friday that they didn't believe that any of the current budget proposals under consideration by lawmakers would do anything significant to reduce the persistent gap between government spending and revenues. Now obviously, there was a lot of reactions to this news, with some people angry at Moody's, others saying that it's necessary, others saying that it's not important at all and this can just simply be ignored. Scott Besant, the treasury secretary, tried to downplay this news. On Meet the Press, he was asked about it and he said, quote, Moody's is a lagging indicator. That's what everyone thinks of credit agencies. He says, we didn't get here in the past 100 days. It's the Biden administration and the spending that we've seen over the past four years that we've inherited, and we are determined to bring the spending down and grow the economy. Now this is part of Besant's job, to defend the administration, try to paint the best picture possible, and of course, in the process of that, he is trying to discredit Moody's and S&P Global's credit rating business, suggesting that they're just lagging indicators. They tell you what's already happened. Now as someone that's invested in these companies, this is part of what their business is, not the entire business, but a big part of it is the credit rating agencies. I own both S&P Global and Moody's. They rate over 95% of corporate debt worldwide, so that other companies know the risks they're taking when investing in that corporate debt. These companies play a critical role in the financial system, so not only are they rating the debt of the US government and different governments, but their primary business is rating the debt of global corporations. As an investor in these companies, I've spent some time researching their different products, and one thing that you continually see with their credit rating business is that they're not simply lagging indicators. There's actually a number of studies that look at the empirical data of Moody's and S&P Global's credit rating business to see if they are simply lagging indicators, or if they're predictive. These studies are conducted by people not affiliated with the business. This one, for example, the predictive accuracy of credit ratings, measurement and statistical inference, modeled out how accurate these ratings really are. They have what's called AR, an accuracy ratio. The accuracy ratio assesses the discriminatory power of the credit ratings by comparing the cumulative accuracy of the ratings to a random model. The findings of this study indicated that the credit ratings possess a significant degree of predictability and accuracy concerning credit events. This is why they're considered a valuable tool for businesses to assess risk, is because the ratings overall that Moody's and S&P Global give are highly predictive. And this is not the only study to come to this conclusion. In fact, any peer-reviewed study on the subject concludes the same thing, that overall there's outliers where S&P Global and Moody's will get things wrong. There's instances where they've made mistakes before, but the overall data concludes that the ratings businesses are highly predictive of credit outcomes. So calling these companies simply lagging indicators is not a correct assessment and that doesn't fit with the actual data. They are looking at lagging data and they're looking at information, but they also assess their credit ratings based on the current standing and the future proposals. Part of what Moody's incorporated in their credit downgrade was this new bill being passed. Right now, the stark math on the GOP tax plan doesn't cut the deficit. And this data was not created by Moody's or S&P Global. This is from Piper Sandler and other third-party analysis firms. They're looking at this saying that we're simply not cutting enough. Moody's and S&P Global and Fitch, which all agree that the credit rating has been lowered on the US government over years past, would probably upgrade the credit rating of the US government if this ratio went down, if debt to GDP decreased, if the US government was paying 3% on its debt obligations and not 7%. Now, having said all of that, I don't think that this is going to crash the market. It's not, again, new information. This is something that we've seen deteriorate over a long period of time. Everyone knows this is a problem that needs to be fixed. And Moody's and S&P Global and Fitch rating the US government isn't quite as meaningful as when they rate an individual company. After all, there's just not as many alternatives to the United States of America as there is to a normal publicly traded company. And in terms of this downgrade, we have people like Tom Lee being asked what investors should do. Should they consider this news in part of their investing plan? I don't know if there's much signal in the downgrade Friday because I think the first AAA downgrade was signal from 2011. I don't think Moody's had any information that we didn't have on Friday afternoon. So I think markets should realize the bond market largely priced in the fact that the US is really not AAA anymore. So I'd be viewing this as a buying opportunity. What Moody's has also changed that's not being highlighted here is they had a negative trend over the past couple of years, meaning things were getting worse for the United States and now they have a neutral trend. So even though their rating went down, they believe that the trend downward has stopped. Investors work based off of what we know and what we don't know. What Moody's did was reflect what most investors already know. I'm assuming today's pullbacks can be really shallow, might even close positive, because most investors rage sold at the bottom in April and then they doubted. Rage sold? I hadn't heard that. Rage sold? Yeah. That's a good one. Is that your own or have you heard that other place? I've heard that. Yeah. Rage sold. Sorry, go ahead. And so as the markets climbed, a lot of people sort of doubted, thought it was a rally that would fail. And so I think there's 720 cash on the sidelines, enormous skepticism from our institutional clients and a lot of folks sort of bet outside the US. So I think there's going to be a lot of chasing into year end. He labels them the rage sellers, the people that quit at the bottom. They got frustrated. They crashed out and they sold all of their stocks at the April lows. And those are going to be the same people that are now chasing stocks into the year end, trying to find whatever there's still momentum in so that they can have some of the upside. I believe there's a very good chance that Tom is correct. And if I have any hope for this Moody's rating, it would be that there's further emphasis on cutting spending and making sure that the US is on a good fiscal path. And we'll see what this tax and spend bill ends up looking like. Now moving on, we get to an interview from Stras Zelenik, the CEO of Take-Two Interactive. This is the creator of Grand Theft Auto 6. As we know, the game got delayed until around mid next year. And this is already after being delayed multiple times. This game is more hyped than any digital property ever made, I believe, in human history at this point. And here's what the CEO has to say about the delays. But the key thing is that Rockstar Games is trying to create the best thing anyone's ever seen in entertainment, not just interactive entertainment. That's a tall order. And I think consumers have huge hopes for the title. We just launched the second trailer to 475 million views in 24 hours, setting a new record. The trailer has been viewed almost half a billion times in 24 hours. That's how many people are anticipating this game. Now one of the things I actually like about this CEO and I like about this company is they're trying to do something that's literally never been done before. You can mock it because it's a video game or try to downplay it because it's just Grand Theft Auto 6. You know, not a big deal. But this company is literally doing something that no other company has ever done before. The amount of development costs, just alone with Grand Theft Auto 6, has exceeded one billion dollars, beating out everything else in digital entertainment. Every song, every movie, every game. This company is literally pushing the boundaries of digital entertainment. On top of that, the whole reason that this company wants to continue delaying the release of the game is because they have such a strict focus on quality. But the delay itself is really a reflection of desire to polish and create the best possible experience for consumers. And we as a company have been known not to have sort of slavish devotion to release dates, but rather to seek the highest quality entertainment. And that's really supported our success over many years. They have a philosophy of not looking at just next quarter's numbers. They're willing to say that we're going to earn a lot less money than expected in 2025 or 2026 because we're pushing the game way back. And we don't care what investors think about this in the short term. We need this thing to be done right. That is something that I really respect from Rockstar Games. Most CEOs and most companies would be incredibly anxious to release a game like this. They would want to make as much money as soon as possible. They'd want to monetize it as much as possible in the short term. And they're not choosing that easy path. So I'm going to go out on a limb here and say I'm one of the few that is completely okay if this game gets delayed because I think it's better for them to focus on quality to create something truly unique and breathtaking with scale and complexity that's never been done before. Even if you're not a fan of Grand Theft Auto specifically, you have to admire what this company is willing to do, how much they're willing to invest, what they're willing to risk on all a single release. It is astounding the effort this company is putting into a single title. Now finally, we get to this viral video clip of a police officer talking to a Waymo vehicle. Let's take a look at it here. Now, this is just a weird situation. Just at face value, this is a really odd situation. You have the Waymo there with no one in the passenger or driver's seat. You have the police officer there jotting down notes and kind of like leaning in, even looking at the driver's seat as if someone's there. You know, he's used to talking to someone there and doesn't really know where to look. So he's just awkwardly kind of looking in the vehicle like he's having a conversation with no one, no one being there. The people recording it believe he's talking to AI, which I don't believe is the case. When Waymo has any type of event happen, any type of collision, they can have remote drivers take over and communicate to the passengers or a police officer through the remote communication. So he's likely talking to a human, but it's just so funny the way that this looks. Looking at a bit more backstory, it does look like the Waymo was involved in a collision and you can see evidence of that with the LiDAR being busted up in the front right. Now reportedly, it wasn't the Waymo's fault. It was trying to actually avoid the collision, but couldn't. Already the world is looking crazier by the minute and things are going to get a lot more crazy over the upcoming years. That's it for this episode. See you in the next one.