Universal Health Services Stock Surge Could Continue in 2Q

The Trump administration's failure to repeal Obamacare has bolstered Universal Health Services shares

Mar 29, 2017 at 10:22 AM
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Hospital operator Universal Health Services, Inc. (NYSE:UHS) has been in the spotlight recently, amid efforts by the Trump administration to replace Obamacare. In fact, the demise of the American Health Care Act last week has been a boon to UHS stock, which is up 7% at $125.69 since its most recent low on March 22 -- the day before the House was originally supposed to vote on a healthcare overhaul. And, if past is precedent, the shares could have even more fuel left in the tank.

Yesterday, we highlighted the top stocks for the second quarter over the past 10 years. Only one of the 25 S&P 500 Index (SPX) components listed was positive 100% of the time in the past decade: UHS. Not only that, but the healthcare stock has averaged a gaudy second-quarter gain of 11.8%. If history repeats itself, the shares will continue an already impressive 2017 campaign. UHS stock's year-to-date return exceeds 17%, more than tripling the SPX's 5.2% gain.

That said, the equity's sentiment backdrop leaves much to be desired, from a contrarian perspective. Our Expectational Analysis® methodology tends to favor outperforming stocks with low expectations, which often translate into buying power as the market begins to rethink things. 

But in the case of UHS, negativity is hard to find. Nearly three-quarters of analysts rate the shares a "strong buy," without a single "sell" opinion to be found -- suggesting limited potential for future upgrades. Plus, less than 3% of the stock's float is sold short, so there's not much room for short-covering activity.

Options traders have shown a preference toward puts lately. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 1.20 UHS puts for every call. However, this is based on a total volume of fewer than 300 contracts. In fact, looking at total open interest among strikes expiring in the next three months, there are only about 3,900 contracts in residence.

That doesn't necessarily mean it's a bad time to trade Universal Health Services, Inc. options. In fact, the opposite is true. UHS sports a Scheffer's Volatility Index (SVI) of 23%, ranking in the low 10th annual percentile -- suggesting the stock's short-term options are attractively priced at the moment, relatively speaking.

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