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Healthcare Outlook: Coronavirus at Center Stage

And some undervalued stocks that capture our attention.

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Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Damien Conover: In looking at the healthcare outlook for the quarter ahead, we first wanted to take a look back and see how healthcare has performed. And if we look at the trailing 12 months, healthcare has had a very good performance. It's up close to 20%. However, that's slightly behind the broader overall market.

We think there are some concerns still about healthcare about potential major policy reform in the United States. However, following the November election, we think the odds of very significant healthcare reform make it such that it seems unlikely we'll see radical changes, and that has implications for healthcare that we'll talk about as we go forward.

But first off, when we think about valuation, we think the overall healthcare sector looks fairly valued. But pockets of healthcare look more undervalued than others. In particular, the drug space and biotechnology space look undervalued, in our view, and that comes back to the view about concerns about major policy reform. Since we do not expect major pricing pressure from the U.S. government, we think the group has a lot more potential than where the market is currently valuing these stocks.

Secondly, we also see a lot of opportunity in the managed-care organization. Again, this is an industry where there is some concern about major U.S. policy reform that could weigh on these stocks.

Overall, healthcare has adapted very well to the coronavirus, both fundamentally and potentially as offering avenues to solve this pandemic. From the fundamental side, we're seeing a nice rebound in some of the more elective areas such as dental and orthopedic hip and knee replacements. We're starting to see that come back, and we expect that will continue as the pandemic ebbs. And one of the things that we think will really help stem the pandemic are drug and vaccine developments going on within the large-cap pharmaceutical and biotechnology space.

On the vaccine side, we've already seen the launch of two vaccines coming from Pfizer (PFE) and Moderna (MRNA), and with such strong efficacy, we think this launch of vaccines will really slow the overall coronavirus pandemic. Now, we don't think that these vaccines and treatments will really be a major windfall for the drug industry because we expect, by 2023, that these sales really start to fall dramatically. But we do expect the drug companies to have a great deal of goodwill built with the different policymakers of the world--that should help fight against any major policy reform that would hurt drug-pricing power.

So, overall, the drug industry and the managed-care industry look most undervalued and a couple of the stock names we think look most undervalued are Biogen (BIIB) and Biomarin (BMRN). These are two drug companies that have great pipelines that we think are underappreciated by the market. And then, on the managed-care side, we really like CVS (CVS). While CVS is really thought of as a retail company, it also has a very large managed-care organization within it, and we think that company is being overly penalized right now by the investment community that again, I think, is weighing too much policy concern on the managed-care organization space.

Overall, we think healthcare is well positioned going forward, but we think it has to be selective in picking out particular stocks.

Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.