Drugmakers and Managed-Care Firms Are Poised for Growth

Damien Conover: Looking at the healthcare sector today, and one of the areas where we've seen some nice performance, the group is up almost 30% over the last 12 months. While that's been pretty strong performance, the overall market is up almost 50%. So, there's a little bit of underperformance in healthcare relative to the overall market. And we think a lot of that has to do with potential concerns around new U.S. policies that could hurt drug-pricing power and could potentially hurt some of the managed-care organizations. But when we take a look at overall valuation right now, we think the overall healthcare space looks like it's largely fairly valued to slightly overvalued. But again, the two areas that we think have the most interest are the drug manufacturers and managed-care sectors because of this concern around potential U.S. healthcare policy reforms.

Going forward, as we look ahead, we think both groups look well positioned for growth, and we think only moderate policy change will happen, largely because the Democrats only control a slight majority in the senate. And healthcare policy reform is very complex, and we don't think it will happen rapidly or to a huge extent. As we think about the quarter ahead, we do think there's going to be some normalization coming back into the overall healthcare landscape, which we think is particularly important for any healthcare industry that's more elective in nature. So, areas like dental, devices, even some hospital elective procedures, they all should start to rebound, and we're forecasting herd immunity in the United States by the middle point of the summer. Potentially even earlier, depending on how fast the vaccine rollout can happen.

That should move us even more close to a more normalized environment as we progress through the year. When we think about names that we think look undervalued, a couple of stocks we really like are BioMarin and Biogen. These are drug manufacturers that have very strong pipelines in areas of neurology and rare diseases. On the managed-care side, a name we really like is CVS. While well-known for its retail pharmacy, it really generates a lot of cash flow from its managed-care organization. So, overall, while the healthcare space looks moderately overvalued, we do think the drug manufacturers and the managed-care industry look undervalued and well positioned for investors.