The Best Healthcare Stocks to Buy

From a performance standpoint, healthcare stocks have been laggards of late: The Morningstar U.S. Healthcare Index returned only about 2% in 2023, versus a 26% gain for the broad-based Morningstar U.S. Market Index.

Why the underperformance? “There was a rotation out of healthcare in 2023 as the market moved away from thinking a recession was coming and with this, there was a move away from defensive stocks (like healthcare stocks) and toward more growth-oriented stocks,” explains Morningstar director of equity strategy Damien Conover.

Is Healthcare a Good Sector to Invest in Now?

Morningstar thinks healthcare valuations look attractive today across almost all industries. Most larger healthcare firms maintain economic moats; demand for health-related products and services continues to rise as populations age; and healthcare companies tend to have high research and development spending, which can generate major improvements in treatment options.

“The healthcare sector tends to perform well independently of the market cycles, providing more consistent sales and earnings growth,” Conover adds.

The 10 Best Undervalued Healthcare Stocks to Buy Now

The healthcare stocks below all earn Morningstar Economic Moat Ratings of narrow or wide, and they are trading below our fair value estimates as of Feb. 1, 2024.

1. Bayer BAYRY
2. Bausch & Lomb BLCO
3. Royalty Pharma RPRX
4. Baxter International BAX
5. Roche Holding RHHBY
6. Grifols GRFS
7. Fresenius Medical Care FMS
8. Illumina ILMN
9. AMN Healthcare Services AMN
10. Pfizer PFE

Bayer AG

• Morningstar Price/Fair Value: 0.38
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 8.43%
• Industry: Drug Manufacturers—General

German healthcare and agriculture conglomerate Bayer tops our list of the best healthcare stocks to buy now, with shares trading at a 62% discount relative to our $20.50 fair value estimate.

Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a narrow economic moat. Bayer is evaluating the divestitures of the crop science and consumer healthcare businesses, which appear to hold few synergies with the prescription drug business.

In the healthcare division, Bayer’s strong lineup of recently launched drugs and solid exposure to biologics should support steady long-term cash flows. Bayer’s hemophilia franchise and key ophthalmology drug Eylea are biologics. While competition is increasing in hemophilia and in eyecare, the manufacturing complexity of these drugs helps to deter generic pressure. Also, new formulations of Eylea and hemophilia drugs hold potential to keep competition at bay. Further, strong demand for cardiovascular drug Xarelto should continue to drive growth, but the drug’s key 2026 patent loss will likely create growth headwinds.

Bayer’s healthcare segment also includes a consumer healthcare business with leading brands Aspirin and Aleve. Brand recognition is key in this unit, as evidenced by the company’s iconic Aspirin, which continues to post strong sales even after decades of generic competition.

In addition to healthcare, Bayer runs a leading crop science segment, which includes crop protection products (pesticides, herbicides, fungicides) and the fast-growing plant and seed biotechnology business. Similar to the drug business, this segment is research and development intensive, and Bayer has developed a strong portfolio of products. The downside to this business is that demand is heavily dictated by weather and commodity prices, which will determine how much farmers can afford to spend on crop treatment. The acquisition of Monsanto has significantly expanded Bayer’s competitive position in this industry. On the negative side, the acquisition increased Bayer’s exposure to litigation around potential side effects from glyphosate use. While many studies have shown glyphosate use to be safe, some reports of linkage to cancer drove large class-action legal cases against Bayer and led to a legal settlement of over $15 billion.

Bausch & Lomb

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Medical Instruments & Supplies

Bausch & Lomb is the first of two medical-device makers on our list of the best cheap healthcare stocks to buy. The stock of the leader in vision care currently looks 46% undervalued relative to our $26.00 fair value estimate.

Bausch & Lomb is one of the largest vision care companies in the U.S. Bausch spun off from its former parent company, Bausch Health, in 2022 and it now operates in three segments: vision care, surgical, and ophthalmic pharmaceuticals.

Vision care made up 63% of total sales in 2022 and is composed of contact lenses, lens care solutions, and OTC eye care products. The U.S. contact lens market is mainly controlled by four players—Johnson & Johnson JNJ (38% market share), Alcon ALC, and The Cooper Companies COO (25% each), and Bausch (10%). Bausch was the last of the four players to launch daily silicon hydrogel lenses, the latest technology in the contact lens market, and we believe it has some catching up to do in terms of innovation. But we don’t expect this to weaken its position because market share tends to shift slowly due to the high switching cost nature of the industry. We expect the segment to grow at mid-single digits over our forecast period as more people choose daily and specialty lenses, which are priced higher than reusable and monofocal lenses, and an increasing prevalence of myopia, or nearsightedness.

Surgical made up 18% of total sales in 2022 and is composed of intraocular lenses, or IOLs, surgical equipment, and consumables. The segment was relatively underfunded prior to Bausch’s IPO partly due to the high debt load of its former parent company, but we expect more investment into the segment going forward. Bausch currently does not have much of a presence in premium IOLs, and we think this will be a main research focus as Bausch attempts to play catch up with its peers.

Ophthalmic pharmaceuticals made up 19% of total sales in 2022. Bausch significantly improved its dry eye treatment offerings in 2023 with the FDA approval of Miebo and acquisition of Xiidra (from Novartis NVS). We expect Miebo to launch during the second half of 2023 and the Xiidra deal to close by the end of the year. With these two drugs under its belt, we expect a significant margin and top-line expansion for the segment in 2024 (Xiidra’s 2022 sales were $487 million). We forecast a slow margin expansion starting 2025 until 2030, when we expect Xiidra to start facing generic competition.

Royalty Pharma

• Morningstar Price/Fair Value: 0.55
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 2.96%
• Industry: Biotechnology

The only biotech firm among our list of the cheapest healthcare stocks, Royalty Pharma is one of just two names on this list that earns a Morningstar Capital Allocation Rating of Exemplary. It trades at a 45% discount to our fair value estimate of $52.00.

Royalty Pharma is the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. The company makes lump-sum payments in exchange for future cash flows linked to those products’ sales revenue, which differentiates it from other biotech companies that are exposed to high R&D and/or manufacturing costs. Its uniqueness also lies in the diversity of royalties across different therapeutic areas. This stands in contrast to a typical biotech firm’s focus on developing specialized therapies targeting certain diseases.

Royalties play an important role in the commercialization process of cutting-edge therapies. Royalties are usually created as a form of payment when a large biopharma company takes over research insights from smaller biotech firms or research institutions for further marketing and development through licensing agreements. In this process, royalty recipients often face the issue where multiple small future royalty streams cannot fulfill ongoing large lump-sum R&D funding needs. The mismatch is where Royalty Pharma captures its market opportunity.

The increasing demand for capital across the global biopharma industry has been propelling Royalty Pharma’s growth in recent years. The total dollar value of all royalty transactions in 2022 was 10 times the volume in 2015. Royalty financing shows its advantage as a nondilutive funding method that satisfies instant funding needs despite the conditions of debt and equity markets. As a leading royalty acquirer, we think Royalty Pharma is in a great position to capture market tailwinds.

With the average development cost for a newly approved drug surpassing $1.4 billion in 2022, we find Royalty Pharma’s capability of executing large deals appealing. Royalty Pharma has a dominant market position for transactions sized over $500 million. The company’s extensive experience in structuring flexible deals with installment and milestone payments makes it a preferred choice for many royalty sellers.

Baxter International

• Morningstar Price/Fair Value: 0.58
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 3.0%
• Industry: Medical Instruments & Supplies

Our analyst sees possibilities ahead for Baxter International as it shakes off external pressures and renews existing contracts. This cheap healthcare stock trades at a 42% discount to our fair value estimate of $67.00.

Although the 2015 Baxalta spinoff was successful, Baxter’s financial results fell substantially in 2022-23 on external pressures, such as inflation and weak medical utilization trends. We see these external pressures easing. Also, we suspect Baxter’s financial prospects will improve, especially in 2025 and beyond, as hospitals renegotiate their reimbursement deals with third-party payers, and as Baxter renegotiates significant contracts, a key group purchasing organization among them.

From a business strategy perspective, Baxter is currently focused on spinning off its kidney care division and improving the profit growth of its other businesses. In kidney care, Baxter’s renal and acute care technology supports patients with failing kidneys. Baxter generates most of its kidney care revenue from at-home patients using its peritoneal dialysis, or PD, tools, but it also sells hemodialysis products to dialysis clinics and continuous renal replacement therapy and other organ support equipment to intensive care units. Concerns about long-term demand for dialysis, given the halting of a related obesity drug trial, have created uncertainty around the kidney care segment’s expected spinoff by mid-2024. However, we suspect the intermediate-term outlook for dialysis demand has not changed much given potential benefits of those drugs on surviving renal patients.

The balance of Baxter’s business is focused on providing basic medical supplies and equipment to caregivers such as hospitals, which have been under pressure in recent years due to a mismatch in labor cost hikes and reimbursement rates with third-party payers that are in the process of being renegotiated. Through the 2021 Hillrom acquisition, Baxter provides beds, patient-monitoring devices, and other digital tools. These Hillrom tools, along with Baxter’s own infusion pumps, have been negatively affected by inflationary pressures on input costs that have severely depressed margins, which remain a key area for Baxter to improve. Baxter also sells many injectable therapies, such as IV solutions, generic pharmaceuticals, and surgical tools to control bleeding.

Roche Holding

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 3.64%
• Industry: Drug Manufacturers—General

Swiss biopharmaceutical firm Roche Holding is the second company on our list to earn an Exemplary Morningstar Capital Allocation Rating for its sound balance sheet, exceptional investments outlook, and appropriate shareholder distributions. Roche stock is priced at a 40% discount to our fair value estimate of $59.00

We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic expertise.

Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition. In addition, with the launch of Perjeta in 2012, Kadcyla in 2013, and Phesgo (a subcutaneous coformulation of Herceptin and Perjeta) in 2020, Roche somewhat refreshed its breast cancer franchise. Gazyva, approved in CLL and NHL and in testing in lupus, as well as new bispecific antibodies Columvi and Lunsumio will also extend the longevity of the Rituxan blood cancer franchise. Roche’s immuno-oncology drug Tecentriq launched in 2016, and we see peak sales potential above $5 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales).

Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens SMAWF, Abbott ABT, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

Grifols

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Drug Manufacturers—General

Plasma products company Grifols earns a narrow moat rating based on its market’s high barriers to entry. However, we recently raised our Fair Value Uncertainty Rating on the stock to Very High following questions about accounting practices. Grifols stock trades 36% below our fair value estimate of $13.40.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda TAK and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

Today, Grifols holds more than 20% of a roughly EUR 15 billion immunoglobulin market that is growing at a double-digit rate thanks to demand across multiple types of immune disorders. While IG accounts for more than 40% of Grifols’ top line, pulmonary product Prolastin leads the market for alpha-1 antitrypsin deficiency, and Grifols has seen solid albumin growth, owing to Chinese demand. With several products under the same roof, Grifols is able to improve margins, as more of the proteins in plasma are turned into marketed products.

Recombinant and novel hemophilia products have shrunk the plasma-derived factor market, and Grifols is facing new competition in the immunoglobulin market from novel FcRn targeted therapies, as well as recombinants and gene editing therapies that could compete with Prolastin. However, we continue to see immunoglobulin market demand as solid in the near term to midterm, due to several large indications that are less vulnerable to competition, and gene editing is likely to take years to reach the market. In the meantime, Grifols continues to expand its pipeline, driven by the recent Alkahest, GigaGen, and Biotest acquisitions.

The $1.7 billion acquisition of Novartis’ blood and plasma diagnostics business in 2014, followed by the $1.85 billion acquisition of partner Hologic’s HOLX share of this business in 2017, complements Grifols’ plasma business, locking in a dominant market share in blood and plasma testing in the United States. The diagnostics arm represents around 10% of total revenue and offers a steady business that diversifies Grifols’ operations in the long term.

Fresenius Medical Care

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Medical Care Facilities

We think Fresenius Medical Care, already the world’s largest dialysis company, has more avenues for growth ahead. This cheap healthcare stock is 40% undervalued; we think it’s worth $32.00.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from decent demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to grow at a similar pace during the next five years, if it can get past current inflationary and other challenges.

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita DVA) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers.

With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

Illumina

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Diagnostics & Research

Illumina, the only Diagnostics & Research firm on our list of cheap healthcare stocks to buy, provides tools and services to analyze genetic material. Shares of this stock look 37% undervalued compared with our $228.00 fair value estimate.

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

During the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HiSeq X in early 2014. Further innovation, like the NovaSeq, continued to push down these costs, and Illumina expects its new NovaSeq X Series to enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genome sequencing could have wide appeal in clinical applications beyond current strongholds in oncology and reproductive health.

Threats from disruptive technologies may never fully disappear, though. For example, new cheaper sequencing tools may eventually displace Illumina’s stronghold in genomic sequencing. Currently, we remain unconvinced that emerging systems will fully dethrone Illumina’s sequencing technologies, though, given the switching costs associated with its large installed system base and its own new commercialization efforts. Additionally, the firm’s recent bet on Grail’s liquid biopsy technology exposes it to new risks in the very large but nascent preventative care testing market for cancer. For example, it remains to be seen if practitioners and payers will get on board with the new technology. Also, future entrants could disrupt this end market, which we think will depend mainly on intangible assets rather than switching costs, in the long run.

AMN Healthcare Services

• Morningstar Price/Fair Value: 0.64
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Medical Care Facilities

AMN Healthcare Services is one of America’s largest healthcare staffing companies. This cheap stock trades 36% below our fair value estimate of $115.00.

Healthcare utilization is expected to increase at a solid clip over the coming decades, and the pipeline of healthcare professionals is not expected to keep pace, especially in light of the coronavirus pandemic. This combination of factors should serve as a strong foundation for AMN Healthcare over the next several years. We believe baseline demand will remain elevated over prepandemic levels for the firm’s core service—providing temporary and permanent labor for healthcare providers—over an extended period following the near-term decline in demand as the urgent need for staff eases.

AMN is one of the world’s largest providers of healthcare workers, with the core of its business in the travel nurse market niche. The firm has a large nationwide client base, which has attracted a quality supply of job seekers. We expect AMN’s sizable pool of workers should help the firm to drive top- and bottom-line growth over an economic cycle.

AMN’s ability to provide almost any type of medical worker is also highly attractive to its customers, as they can use one vendor for most of their placement needs. These managed services relationships have been a major focus for AMN Healthcare, and the firm has become one of the premier HR managed services providers as a result.

A managed services arrangement entails AMN Healthcare taking over the entire staffing and employee measurement process for a provider system. We believe this strategy will serve to reinforce its narrow economic moat. This service creates higher customer switching costs, allows AMN to gain first shot at meeting a customer’s entire staffing needs, and gives the firm the opportunity to see real-time leading metrics in the healthcare industry.

Having said that, AMN is exposed to fluctuations in the larger labor markets and any hiccups in the growth of healthcare workers. Healthcare staffing firms have historically been hard-hit after economic downturns, and we expect this to hold true in the future.

Pfizer

• Morningstar Price/Fair Value: 0.64
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 6.20%
• Industry: Drug Manufacturers—General

Pfizer rounds out our list of the best healthcare stocks to buy now. While it is the most expensive stock here, Pfizer still looks undervalued as it trades 36% below our fair value estimate of $42.00.

Pfizer’s foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company’s large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business.

Pfizer’s size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer and immunology.

Pfizer’s vast financial resources support a leading salesforce. Pfizer’s commitment to postapproval studies provides its salespeople with an armamentarium of data for their marketing campaigns. Further, leading salesforces in emerging countries position the company to benefit from the dramatically increasing wealth in nations such as Brazil, India, and China.

Pfizer’s 2020 move to divest its off-patent division Upjohn to create a new company (Viatris) in combination with Mylan should drive accelerating growth at the remaining innovative business. With limited patent losses and fewer older drugs, Pfizer is poised for steady growth (excluding the more volatile COVID-19 product sales) before a round of major patent losses hit in 2028.

We believe Pfizer’s operations can withstand eventual generic competition; its diverse portfolio of drugs helps insulate the company from any one particular patent loss. Following the merger with Wyeth several years ago, Pfizer has a much stronger position in the vaccine industry with pneumococcal vaccine Prevnar. Vaccines tend to be more resistant to generic competition because of their manufacturing complexity and relatively lower prices.

How to Find More of the Best Healthcare Stocks to Buy

Investors who’d like to extend their search for healthcare stocks to invest in can do the following:

• Review Morningstar’s comprehensive list of healthcare stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of healthcare companies to research and watch.
• Read the latest news about notable healthcare companies from Morningstar’s Damien Conover and Karen Andersen.