UnitedHealth Shares Hit Upside Target And Retreat - How Low Will They Go?

UnitedHealth Group Inc. UNH pulled back to its initial uptrend line during the recent market weakness and held strong there. The stock has since rocketed higher, leading the U.S. markets on the upside. The stock made new all-time highs with ease and ran all the way up to the upper edge of the uptrend channel (see the purple line on the chart) before pausing.

How high can this stock run? How far will it tumble on a pullback? Are the fundamentals backing up the bullish technicals?

What The Bulls See

• Some cheap valuation metrics: An enterprise value of $101.35 billion that tops the market capitalization of $93.97 billion, a price-to-book ratio of 2.85 and a price-to-sales ratio of 0.73.
• Positive levered free cash flow of $2.74 billion annually.
• A debt-to-equity ratio of 51.54 percent.
• A 1.6 percent dividend yield.

What The Bears See

• A PE ratio of just under 16, which seems expensive compared to estimated 2015 revenue and earnings growth of 7.9 percent and 8.7 percent, respectively.
• Slim net profit margins of around 4 percent.
• A current ratio of only 0.74, where readings above 1 are considered "healthy."

The Technical Take

Technicians note that UnitedHealth shares hit the upper edge of the long-term uptrend channel when it peaked out a few sessions ago. There's no rule stating that the stock must retreat sharply from here, but it was a good place for a pause to begin. If the stock does pull back rather than hold steady, the first couple of support levels will come in at the previous all-time high at $88.85 and the first of two upside gaps at $85.39. That second level may correspond well with the lower edge of the uptrend channel by the time the stock gets down there, if it gets down there.

Resistance comes in at the recent peak of $96.64 and is backed up by the (higher) upper edge of the uptrend channel at the $97-$98 level.

One Wall Street adage to keep in mind -- the "90 to 100 rule." When a New York Stock Exchange stock hits $90 for the first time, the old rule states that it will run to $100 almost without fail. So, perhaps UnitedHealth's actual resistance will be $100 instead of the upper $90s.

Overall…

United Health is a very bullish story from a technical viewpoint. Fundamentally, UnitedHealth's story is not as clean as some other health-related stocks. The company is not cheap enough to attract value buyers and it is not sporting growth rates high enough to attract growth investors. That means the stock's stellar performance is almost certainly attributable to the computer-run trend following programs. Those don't stay long of stock indefinitely, so be careful.