Editor’s note: This is part three of a 13-part series about companies whose shares have amassed 100,000% returns for investors and the path taken to generate such impressive gains over the long term. See below for links to the other stocks in this series. Part one is: McDonald’s Stock: How Small Changes Have Led to 100,000% Returns. Part two is: How Amazon Stock Became a Member of the 100,000% Return Club.
Mergers and acquisitions are exciting. Captains of industry think of big ideas about how to change the landscape of different industries and then set out to try and accomplish it with billions of other people’s money. The sexy part is chasing the deal. The hard part of mergers and acquisitions is integrating what you have bought to deliver the profits or the cost savings that you forecast.
Many fail at this. Some of the worst mergers and acquisitions in history include Sears and Kmart, Citicorp and Travelers Group, Microsoft and Nokia, and, of course, no list would be complete without mentioning AOL and Time Warner.
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What UnitedHealth Group (UNH) has done perhaps better than any other company in American history is to buy companies – which, as mentioned, is something any company can do – and then integrate them into a cash-generating machine, which, as mentioned, is something few companies can do.
Testimony to UnitedHealth Group’s skill in integrating the companies it buys shows up on its bottom line. Specifically, since 2005 (the oldest year for which its financial performance figures are readily available), the company has never reported a loss. Quite the contrary. UnitedHealth has grown its earnings from $3 billion that year to $23.1 billion in 2023. This represents average earnings growth of 12.0% per year. First, very few companies have gone nearly 20 years without a loss, especially those who are acquisitive.
Second, almost nothing of value grows at 12% per year. The U.S. economy doesn’t (about 3%). The Standard & Poor’s Index doesn’t (about 7.7% over the last 20 years). The Nasdaq Composite Index doesn’t (about 10.9% over the last 20 years).
But UnitedHealth does.
Since 2004, UnitedHealth has made approximately 17 major acquisitions of insurance, healthcare and healthcare technology companies. And these are the ones that are easily discoverable since they were disclosed in news releases. And the bar for issuing news releases is high.
Companies must disclose transactions that are considered “material” which is defined as greater than 5% of the issuer’s assets. Since UnitedHealth’s assets at the end of 2023 were $273 billion, this means any acquisitions smaller than $5.8 billion (5% of $273 billion) may not be generally known.
The things that can go wrong when one company acquires another range from the unexpected to the inane. Sometimes their technology proves incompatible. Sometimes integrating the operations takes orders of magnitude longer than imagined. Sometimes there are cultural clashes. Sometimes customers balk, then walk, at the changes that are imposed on them.
Whatever the various sources of distress, they either retard earnings growth or they deliver losses. Slowing growth is bad news on Wall Street because the market is in the growth game. It’s the single most important variable influencing stock values.
The only thing Wall Street likes less than slowing growth are losses. Some losses are more consequential than others. Losses predicted on software incompatibilities, or boardroom clashes, while not embraced, can still leave room for optimism of brighter days ahead. But a write-down of say, $99 billion, attributable to all the reasons above, and then some, which was taken just two years after AOL and Time Warner merged can be fatal for a company’s future and investor’s capital.
Even a company whose overriding strategy is M&A can spook investors because the risks of integration are well known. And this is what puts UnitedHealth Group’s performance in context, and helps explain a 400,000% return.
Notably, UNH has suffered a precipitous decline of late, from about $550 to $467. That’s the thing about the stocks in the 100,000% club. They don’t just go up. They go down too. UNH went from a high of nearly $65 in 2005 to a low of $19 in early 2009, a stunning loss of two-thirds of its value. There are similar stories for Nvidia and Amazon. Over the long haul, UNH had risen more than 300,000% but for an investor to earn this, they needed conviction and lots of it.
Note: This content first appeared in Louis Navellier’s latest book, The Sacred Truths of Investing: Finding Growth Stocks that Will Make You Rich, which was published by John Wiley & Sons, Inc.