Small-cap healthcare stocks may be down, but they aren’t out, according to Bank of America.
“Health care has been the No. 1 detractor from Russell 2000 returns this year and last, and still ranks last in our small-cap sector work, [based] on poor valuations, revisions and momentum,” the investment firm's strategists wrote in a commentary.
“Many of our healthcare teams note a persistent sentiment overhang, but we see some positive shifts.”
'Clients Beginning to Buy Health-Care Stocks'
Among health-care stocks, the number of Bank of America upgrades versus downgrades is improving, the strategists said.
“Clients are beginning to buy health-care stocks, and fund positioning has come off lows,” though it’s still underweight, they said.
“Health care also offers more opportunity for value investors: Last year's extreme growth versus value skew in small-cap has been halved.”
Meanwhile, after a lack of health-care merger activity during the past two years, “deals are picking up,” the strategists said. The current pace of transactions would lead to the highest yearly number since 2017.
“An M&A pickup would be bullish for performance,” the strategists said. “Small-cap health care has outperformed 80% of the time in heavy health-care M&A years.”
Small-Cap and Midcap Stock Ideas
Bank of America formulated a list of small- and mid-cap stock ideas from its analysts. The list includes:
· Tenet Healthcare (THC), a hospital owner. “THC's shift toward faster growth, lower capital intensity ambulatory surgery centers is a positive, while strong cost control is improving performance in the core hospital business,” the firm's analysts said. “Both businesses have already begun to benefit from the normalization of volumes and the improving economy.”
· Option Care Health (OPCH) , a home-health-care provider. It’s “our favorite home care name,” the analysts said. “Among them, it is the least exposed to labor costs, with increasing upside from future deals, as it deploys its improved free cash flow.”
· Alnylam Pharmaceuticals (ALNY), a commercial-stage biotechnology company focused on developing novel therapies based on RNA interference “We view ALNY as an attractive pick for 2022 given the anticipated mix of both late-stage and early clinical readouts,” BofA analysts said.
· Axonics (AXNX), a medical-device company specializing in incontinence therapy. “We believe there is upside” to Wall Street earnings estimates for 2022 and 2023, BofA analysts said. They see “AXNX's valuation relative to the group expanding, as investors get more evidence that the SNM [sacral neuromodulation] market is accelerating and that this is more than just share gains.”
· Qiagen (QGEN), a diagnostic-technology company. “After a tumultuous three years, which saw the company change CEOs, shareholders veto acquisition of the company by Thermo Fisher Scientific (TMO), and significant tailwinds from covid-19 testing, we think QGEN emerges … in a stronger competitive position,” BofA analysts said.
