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Healthcare Slump Is a Buying Opportunity

Damien Conover, CFA

Damien Conover: The healthcare sector has been one of the more underperforming sectors since the beginning of the year. There are two main drivers that are causing this pullback. First off, we're seeing a global slowdown that is impacting healthcare, and we're also seeing concerns over drug pricing, primarily in the U.S. We think that both of these issues have been overdone, and we believe in the healthcare sector. There are a lot of industries that offer compelling valuations.

Now, let's take a look at some of these concerns. First off, with the slowing global growth, we think that when you look at the elasticity of healthcare products, they are generally inelastic, meaning people don't give these products up as the markets start to slow down. So, we think healthcare will hold up reasonably well.

Second, when we think about the concerns over drug pricing in the U.S., we think this is overdone as well. While we think there could be some slight reforms, generally speaking, we don't anticipate the U.S. government to enact major reform. So, that should enable drug prices to actually hold up pretty well. Within this context, we think the large-cap pharmaceutical stocks and the biotechnology sector look undervalued in our view.

There are two names we'd recommend. The first one is Biogen Idec (BIIB). This is a firm that specializes in multiple sclerosis drugs and has a pipeline focused in Alzheimer's disease. Both of those areas should have very strong pricing power going forward.

Another name we like a lot right now is Pfizer (PFE). Pfizer is right in the midst of acquiring Allergan (AGN), which should give it a lot of faster-growing products relative to what it currently has along with a much lower tax rate.

Both of these names, we think, are significantly undervalued, and we'd advise investors to take a look.