Healthcare stocks have been in the "sick bay" recently. We believe this will prove to be temporary, asserts value investment specialist John Buckingham, editor of The Prudent Speculator.
A shift in investor attention away from safer stocks, worries about government price controls, or question marks about medical cost ratios have made for frequent up-and-down gyrations among healthcare companies over the last couple of years.
Despite long-term demographic trends broadly supportive of continued growth and solid earnings, investors oscillated between spooked and confident, at least as reflected by the S&P 500 Health Care index standing today not too far above where it was priced 18 months ago.
True, more modest growth potential today might suggest lower valuation metrics are warranted than in years past. However, in an environment where utility stocks trade for P/E ratios in the mid-teens, we believe that Big Pharma stocks like Pfizer Inc. (PFE) and Bristol-Myers Squibb Co. (BMY) as well as biotech giants Amgen Inc. (AMGN) and Gilead Sciences Inc. (GILD), all of which boast utility-like yields, deserve significantly more love.
Looking at managed-care, the disclosure from industry giant UnitedHealth Group Inc. (UNH) that costs were on the rise due to an increase in pandemic-delayed surgeries among older adults has created a great entry point in stocks like Elevance Health Inc. (ELV) and CVS Health Corp. (CVS), each of which trades for significantly lower multiples of earnings.
With the pandemic-related slowdown in voluntary procedures largely in the past, hip and knee orthopedic implant king Zimmer Biomet Holdings Inc. (ZBH) has encountered a new purported headwind: GLP-1 drugs (such as Ozempic), which have the potential to make a major dent in global obesity rates.
The thinking is that lower Body Mass Indexes (BMI) will result in fewer joint-related surgeries. ZBH CEO Ivan Tornos claims the opposite is true as lower rates of obesity will actually be a boon for Zimmer considering that damaged cartilage, osteoarthritis, and other joint issues are usually irreversible.
Moreover, Mr. Tornos says some doctors are uncomfortable operating on patients with BMIs above 30 or 40 (depending on location), so more folks with lower BMIs could mean more Zimmer device usage.
