The S&P 500 has dropped 24% so far this year, and Dave Sekera, chief U.S. market strategist for Morningstar, sees continued volatility ahead for the market.
But stocks are trading 20% below fair value, according to the estimates of Morningstar analysts. So Sekera sees some buying opportunities.
One sector he likes is medical technology. “We think there are a lot of good secular tailwinds within med tech,” he said in a commentary. And, “we see a lot of undervalued opportunities there today.”
One of those is medical device company Zimmer Biomet (ZBH). Morningstar assigns it a wide moat and estimates its fair value at $175. It recently traded at $108.
Pandemic Delays
“During the pandemic, you had a lot of patients that had been putting off procedures, different types of large-joint replacements over the past couple of years,” Sekera said.
“Our analytical team has taken a look at the backlog for the company. They estimate that based on those delays plus the natural growth in that sector, it’s up to two years.”
Another stock Sekera likes is Illumina (ILMN), which makes genetic sequencing products. Morningstar assigns it a narrow moat and puts fair value at $307. It recently traded at $204.
It’s a “little riskier” than Zimmer, “but I think it does have some really strong longer-term catalysts,” he said. Investors should make sure they understand some of the catalysts before buying. “But this is one of those stocks that we think could have exponential growth in the future,” he said.
“They have a product in the liquid biopsy space that we expect to come to market over the next couple of years. It can screen for, I think, up to 50 different types of cancers and that really could be a game changer in cancer screening.”
Pet Treatment
Sekera also recommends Zoetis (ZTS), which he called “the leader of innovative pet therapeutics.” The company sells healthcare products for animals. Morningstar gives it a wide moat and puts fair value at $186. It recently traded at $146.
“A lot of pet owners have really been shifting their attitudes on how much they're going to be willing to spend on their pet healthcare,” Sekera said. “So, that's an area where we do see long-term secular growth.”
Morningstar analyst Debbie Wang wrote in a commentary that “Zoetis is the undisputed leader in the global animal health industry, and we believe it possesses the widest moat of all the competitors.”
