Health-care stocks have outperformed the market as a whole over the past year, as our demand for health products and services hasn't quit.
The S&P 500 Healthcare index rose 4.8% over the past 12 months, compared with a 6% decline for the S&P 500 as a whole.
Still, the average health-care stock covered by Morningstar was about 11% undervalued compared with the firm’s fair-value estimates as of Dec. 31.
The undervaluation is prevalent among most health-care segments, particularly medical devices, biotechnology, care providers and services industries.
Here are Morningstar’s top undervalued health-care stocks.
Illumina (ILMN), which provides tools and services to analyze genetic material. Morningstar analyst Julie Utterback assigns the company a narrow moat (competitive advantage) and puts fair value for the stock at $269, 27% above recent trades at $211.
Illumina’s preliminary 2022 results included “slightly better-than-anticipated sales but a higher-than-expected tax rate for 2022 and 2023,” she wrote in a commentary.
“The company will likely disappoint investors again on the bottom line in the near term, despite an expected strong launch of the NovaSeq X Series [a gene-sequencing system].”
But “over the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling” genomes.
Moderna (MRNA), a biotech company that provides a covid vaccine. Morningstar analyst Karen Andersen gives the company no moat and puts fair value for the stock at $266. That's 39% above recent trades at $191.
She affirmed that fair-value level Jan. 18 following “positive phase 3 data from the first interim analysis of the firm’s respiratory syncytial virus (RSV) vaccine, mRNA-1345,” she wrote in a commentary.
“We’ve raised our assumed probability of approval for the vaccine to 70% from 50%,” she said. But “we’ve also boosted our long-term assumptions for annual research and development expenses following the firm’s massive $4.5 billion guidance for 2023 R&D expenses at a recent healthcare conference.” That’s a big climb from the $3.3 billion spent last year.
Meanwhile, “the market underestimates the potential of Moderna’s mRNA technology,” Andersen said.
Zimmer Biomet (ZBH), which provides medical devices and equipment. Morningstar analyst Debbie Wang assigns the company a wide moat and puts fair value for the stock at $175. It recently traded at $126, or 39% below fair value.
“Zimmer is the undisputed king of large joint reconstruction, by far,” she wrote in a commentary. “We expect favorable demographics, which include aging baby boomers and rising obesity, to fuel solid demand for large-joint replacement that should offset price declines.”
To be sure, “Zimmer stumbled into a series of pitfalls in 2016-2017, including integration issues, supply and inventory challenges, and quality concerns. New management's efforts to turn around the firm have been admirable, but the pandemic has put a damper on progress.”
