In the spring of 2023, UnitedHealth stood as the second-largest stock in the Dow Jones Industrial Average, just behind Goldman Sachs. Despite market uncertainties such as the Tariff Tantrum, UnitedHealth demonstrated resilience, with its stock climbing by nearly 18% in mid-April while the broader market declined by 15%. However, this upward trajectory was short-lived as the stock plummeted dramatically, losing over 50% of its value within a month. Investors now face the critical question: will UnitedHealth’s stock recover? This situation invites a broader discussion about the likelihood of recovery after significant stock declines and the challenges faced by contrarian investors.
Prior to its recent collapse, UnitedHealth had a storied history of overcoming substantial downturns. In the past, the company endured drawdowns exceeding 80% in the 1980s, nearly 55% in the late-1990s, and 72% during the Great Financial Crisis, each time rebounding successfully. Such recoveries echo similar patterns seen in other major corporations like Nvidia, Facebook, and Netflix, which also experienced steep declines before roaring back. Yet, historical data paints a cautionary tale. Research by Michael Mauboussin reveals that among 6,500 stocks analyzed over four decades, more than half never recovered from their peak values after suffering an average drawdown of 85%. Prominent companies such as Citigroup, Nike, Walgreens, Intel, Target, and Estée Lauder currently grapple with prolonged drawdowns ranging from 64% to 88%, some lasting years or even decades.
The allure of buying low and selling high attracts many investors, but success requires patience, discipline, and a keen understanding of value beyond mere price movements. Contrarian investing demands resilience, as it often involves periods of loneliness and discomfort. Anchoring to past price points can be misleading if fundamental changes have altered the company's trajectory. Furthermore, trends may persist far longer than anticipated, driven by emotional factors that temporarily decouple prices from underlying fundamentals.
For those considering investments in heavily discounted stocks, it is essential to recognize that not all fallen giants will rise again. While opportunities exist for savvy investors, the path to recovery is neither guaranteed nor predictable. Investors must weigh these risks carefully and develop strategies that account for uncertainty. The journey through volatile markets requires both courage and prudence, acknowledging that some stocks may never regain their former glory. Understanding this reality is crucial for anyone navigating the complexities of today's financial landscape.