Event: Dow Jones made a rare change to its Industrial Index on Friday by replacing Kraft (KFT) with Unitedhealth Group (UNH). The health insurance company is trading up more than 2% in premarket trading after the news. Over the last 2 years of trading, shares of United Health have gained 53% exceeding the performance of the Dow by 20%. That performance was supported by the certainty provided by the Obama Health Care law that was upheld by the Supreme Court earlier this year. Analysts expect the company to make $5.03 per share in the current year growing 11% in 2013 to $5.58 per share. At current prices shares of United Health trades for 11 times current year estimated earnings.
Analysis: In the short term shares of United Health are likely to see shares appreciate given its addition to the Dow Index. Institutional investors that buy shares of stock based on the index will be bidding up prices to be in compliance with investment objectives. The gains are likely to be short-lived. Expect performance in the long term to more approximate the index. At current prices given expected growth of profits, United Health is fairly valued.
Action: No doubt United Health generates tons of cash cow hence its addition to the Dow Index, but if shares appreciate by more than 10% before the next earnings report, I will be looking to be short this one when September earnings are released.