Amazon Insurance For UnitedHealth

CNBC's Jim Cramer on air as benefit managers tumble (screen cap via Twitter)

Kudos To Kirk Spano

As Seeking Alpha contributor Kirk Spano reminded us on Tuesday, he had warned back in October that UnitedHealth (UNH) was at risk of a decline of 50% or greater. As of Tuesday's close, UNH was up about 16% from Spano's October warning.
 

But Tuesday's swoon in the sector on news of the healthcare joint venture between Berkshire Hathaway (BRK-A), (BRK.B), JPMorgan (JPM), and Amazon (AMZN) highlights the possibility that Kirk Spano may be proven right. With that possibility in mind, I present a couple of ways UNH shareholders can limit their risk while staying long the stock. First, a couple of general thoughts on the "Amazon effect" as applied to healthcare, and the challenge of predictions.

Team 1492 Coming For You

One point Kirk Spano makes, which I agree with, is the significance of Amazon's in-house healthcare unit, Team 1492:

Amazon is already known to have a "secret" healthcare technology project called 1492, which is working on electronic records, billing and virtual visits. Combine technology with the financial strength of the three companies (Amazon, JPMorgan, and Berkshire Hathaway) involved, and bringing a new health insurance competitor to the market seems very likely.

If this new health insurance company would be non-profit and follow a model similar to Kaiser, where other related health companies made some profit, then that shakes up the entire health insurance and health delivery industries.

And Spano also makes a good point about how the joint venture could leverage Amazon's experience in pioneering online disintermediation of traditional, brick and mortar businesses:

It seems very likely to me that the new health insurance company could allow businesses to enroll in health insurance programs using a low-cost online marketing, sales and underwriting process? That would put huge pressure on the other health insurers who largely rely on commissioned agents and a general lack of transparency about plans in the industry.

I made a similar point in an article published on July 27th of last year (The Amazon Effect), where I wrote that medical office building REITs were potentially at risk from Amazon and its Team 1492, after deferring to Seeking Alpha's resident REIT expert Brad Thomas:

Thomas is absolutely right about the growing demand in healthcare, driven by an aging population. But what if a lot of that growing demand will be fulfilled via a combination of automation, virtual office visits, and telemedicine? What if your medical office building REITs end up competing with Amazon and Apple?

Granted, I didn't predict a massive drop for either of the two companies I wrote could be at risk from Amazon (Physicians Realty Trust (DOC) and HCA Healthcare (HCA), arguing instead that REIT investors ought to add the Amazon threat to their analysis. That said, had you bailed out of both stocks at the time I wrote that, you would have missed out on a double-digit loss in DOC, but you would have also missed out on a larger double-digit gain in HCA.
 

On the other hand, had you sold those two stocks I warned were threatened by Amazon and, on the same day, bought equal dollar amounts of Portfolio Armor's top 10 names, you would have been up more than 33% by last Friday, as I noted earlier this week (Beating SPY Through Security Selection):

I've learned to leave specific stock predictions to Portfolio Armor, since it tends to be more accurate than me. Just as I couldn't predict what would happen to DOC and ACA in Amazon's sights, I can't predict what will happen to UNH. But I can show you a couple of ways to protect yourself if Kirk Spano's apocalyptic prediction for UNH comes to pass in the next several months.

Adding Downside Protection To UNH

As a reminder, before we get to the UNH hedges: You hedge when you are bullish, but want to limit your risk in the event your bullishness ends up having been wrong - if you're bearish on UNH now, you should not be long the stock. So, for these examples I will assume that you own 500 shares of UNH, are bullish on it, but are unwilling to risk a decline of more than 13% over the next several months. The screen captures below are from Portfolio Armor's iPhone app.

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