Play UnitedHealth’s Q3 Earnings Beat With These 3 Funds – October 23, 2018

UnitedHealth Group Inc. (UNH Free Report) posted favorable earnings results in the third quarter. The diversified healthcare giant not only posted earnings and revenue beat for the quarter, but also raised its 2018 earnings guidance.

UnitedHealth’s encouraging earnings results had a positive impact on the healthcare sector and boosted investors’ sentiment. Following the promising development, investing in healthcare mutual funds with a significant holding in the Minnetonka-based company will be prudent.

Q3 Earnings in Focus

UnitedHealth Group’s third-quarter 2018 earnings of $3.41 per share surpassed the Zacks Consensus Estimate by 3.33%. The same was up 28% year over year. Higher revenues, strength in both segments — UnitedHealthcare and Optum — plus membership growth led to this outperformance.

UnitedHealth has a tradition of guiding conservatively and then surpassing its own estimates to surprise investors.UnitedHealth posted revenues of $56.6 billion, which beat the Zacks Consensus Estimate by 0.9%. Top line grew 12% year over year, led by strong revenue growth rates across both UnitedHealthcare and Optum segments.

UnitedHealth revised its 2018 financial outlook, buoyed by solid third-quarter results. It now expects 2018 net earnings to be near $12.10 from its previous expectation of $11.80 to $12.05. Adjusted net earnings have been raised to reach $12.80 from the previous target range of $12.50 and $12.75.

UnitedHealth’s Rally: Boon for the Healthcare Sector

Healthcare is now the best performing sector year to date (YTD). It has been outperforming other sectors over the past few months and was also the best performing sector in Q3. Some big money managers have reduced their positions in technology, which had run-up a lot over the past few years, and added to their positions in healthcare stocks, which from a valuation perspective looks attractive.

Additionally, the healthcare sector has jumped 9.8% YTD, becoming the second best-performing sector on the S&P 500. In fact, the healthcare sector’s performance is better than the S&P 500’s increase of 3.1%. Additionally, mutual funds related to this sector registered best returns in all the sector equity fund categories. According to Morningstar, healthcare mutual funds have returned 10.2% YTD.

Buy 3 Healthcare Mutual Funds

Here we have selected three healthcare mutual funds that have significant exposure to UnitedHealth. Moreover, these funds carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy). The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

These funds also have encouraging one-year returns and minimum initial investment within $5000. Also, each of these funds has a low expense ratio.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Fidelity Select Health Care Services Portfolio (FSHCX Free Report) invests a large chunk of its assets in companies that either own or are involved in operating hospital and nursing homes, and are related to the healthcare services sector. FSHCX seeks appreciation of capital. The fund invests in securities of both U.S. and non-U.S. companies.

FSHCX carries an expense ratio of 0.76% compared with the category average of 1.39%. Moreover, FSHCX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 34.9%.

FSHCX has a Zacks Mutual Fund Rank #1. Further, as of the last filing, FSHCX held 24.97% of its assets invested in UnitedHealth. The healthcare giant is the top holding of FSHCX.

T. Rowe Price Health Sciences (PRHSX Free Report) invests the major portion of its net assets in common stocks of companies involved in research, development, production, or distribution of products or services related to healthcare and life sciences. PRHSX may invest in companies of any size but focuses on investing in large and mid-cap companies.

PRHSX carries an expense ratio of 0.77% compared with the category average of 1.39%. Moreover, PRHSX requires a minimal initial investment of $2,500. The fund has one-year annualized returns of 22.2%.

PRHSX has a Zacks Mutual Fund Rank #2. Further, as of the last filing, PRHSX held 7.24% of its assets invested in UnitedHealth. UnitedHealth is the top holding of PRHSX.

Vanguard Health Care Investor (VGHCX Free Report) invests a huge part of its assets in stocks of healthcare companies that are mainly involved in development, production and distribution of healthcare services. The fund may invest around half of its assets in foreign companies.

VGHCX carries an expense ratio of 0.38% compared with the category average of 1.39%. Moreover, VGHCX requires a minimal initial investment of $3,000. The fund has one-year annualized returns of 14.5%.

VGHCX has a Zacks Mutual Fund Rank #2. Further, as of the last filing, VGHCX held 6.14% of its assets invested in UnitedHealth. The healthcare behemoth is the top holding of VGHCX.

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