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Quarter-End Insights

Health Care: A Few Stocks Still Offer Upside

Despite the sector looking slightly overvalued, we still see stocks with attractive valuations across the different industries.

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  • While we view the health-care sector as slightly overvalued, with the group trading close to 5% above our fair value estimates in aggregate, some stocks still look undervalued, including  Amgen (AMGN),  Baxter (BAX), and  Elekta (EKTA B).
  • Overall health-care utilization is increasing slightly after a prolonged pullback due to lingering impacts from the recession and insurance pushing more costs to patients. We expect this trend to continue because of a strengthening economy and increased insurance coverage driven partly by health-care reform in the United States.
  • Further adding to health-care valuations (especially smaller potential health-care targets), mergers and acquisitions continue at a rapid pace, as large conglomerates are looking for growth avenues and opportunities to cut costs, partially through lowering taxes.
  • Strong drug launches and excellent clinical data in specialty-care areas, such as oncology, is increasing the productivity of drug and biotech companies.

While the market valuation of the health-care sector remains slightly above our fair value estimates in aggregate, we still see several undervalued stocks across the different industries. In the table below, we highlight a few of our top picks. As has been the case for several quarters, we believe the current environment for health care continues to lend itself to a stock-pickers' market rather than a focus on industries.

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Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.