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Quarter-End Insights

Stock-Picking Increasingly Critical in Health Care

Despite full valuations overall, we do see some opportunities, especially in pharmacy benefit managers.

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  • In aggregate, the health-care sector is fairly valued, but there are a few pockets of opportunities, particularly in pharmacy benefit managers (PBMs).
  • Mergers and acquisitions are intensifying in the pharmaceutical and device industries, as large conglomerates are looking for growth avenues as well as opportunities to cut costs.  
  • Drug development in specialty-care areas, including virology and oncology, is increasing the productivity of drug and biotech companies.  
  • Overall health-care utilization remains tepid, despite passing the worldwide economic downturn by several years, but we continue to expect gradual improvement over the next year.

Strong gains over the past couple of years have led the health-care sector to largely meet our fair value estimates in aggregate. However, in each industry, several stocks offer attractive valuations. In particular, we believe the pharmacy benefit manager industry offers more appealing valuations. In the table below, we highlight a few of our top picks, including two PBMs. Overall, we believe the current environment for health care lends itself to a stock-pickers' market rather than a focus on industries.

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