Skip to Content
Quarter-End Insights

Healthcare: Stock Selection Key as Valuations Rise

Valuations in the healthcare sector in aggregate look fair, increasing the importance on stock selection where innovation and redeployment of capital weigh heavily.

Mentioned: , , , , , , , , ,
  • In aggregate, valuations in the healthcare sector have slightly increased to a price/fair value of 1.02, up from 1 at the end of the last quarter and 0.87 at the start of the year as solid clinical data and the falling risk of higher payer pressure on branded drug prices are helping drug stock valuations. Against this backdrop, stock selection is increasingly important in healthcare. Our top picks are Express Scripts, ConvaTec, and Allergan.
  • In the United States, we expect the failed attempt to repeal and replace the Affordable Care Act by the Republican-led Congress will lead to less focus by the U.S. government on major changes in healthcare. 
  • Strong clinical data in the drug and biotech industries should support the next generation of innovative drugs while also helping to mitigate pricing pressures from pharmacy benefit managers and government payers.
  • The larger healthcare companies should continue to redeploy strong cash flows through stock buybacks, steady dividends, and potentially accelerated mergers and acquisitions. 

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.