Unitedhealth Group (UNH)

Unitedhealth Group provides health care services in the managed care sector, and has sold off around 50% since the beginning of the year and currently trades at $26/share, or a trailing P/E of about 7.5. UNH was involved in a stock options backdating scandal about two years ago that lead to the resignation of it's chairman.

Unitedhealth is currently ranked #2 in terms of membership and #1 in revenue, giving it considerable scale and leverage.

Current price is about a P/E of 9 of expected 2008 earnings, and valuation appears to be low enough to warrant establishment of an initial position. In addition, Warren Buffett of Berkshire Hathaway has been buying UNH, most recently in the April, 2008 timeframe, at higher prices.

TIPS substitute...floating rate preferred stocks

Earlier, I wrote about preferred stocks as an investment vehicle, however another way they can be used is as a substitute for TIPS, which are indexed to CPI and are considered a hedge against inflation. My big problem with TIPS is that the CPI is a poor index for inflation, since food and fule are excluded, and probably understates actual inflation by a significant amount. This means that any TIPS investor is losing money when they think they're protected.

An interesting substitute is floating rate preferred stocks, which are typically indexed to LIBOR. For example, Sallie Mae has a preferred B that yields LIBOR + .7% which resets in a few years to LIBOR + 1.7%. I think the reset is to encourage the preferred to be called, which is fine since this would represent a capital gain of almost 100%, based on the current price of $54 against the par value of $100. Obviously there is risk based on SLM but I think the exit of large competitors, the 'political' nature of student loans (they're not going away), and the focus on more profitable business with larger spreads means the preferred should do fine, since they are senior to the common stock.