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Quarter-End Insights

Healthcare: Stock-Picking Increasingly Important as Valuations Rise

We think ACA repeal efforts are unlikely to lead to major legislative changes.

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  • As concerns surrounding pricing power for drugs is partially abating, market valuations in healthcare have increased over the past quarter, with drug companies rallying. The recent aggregate healthcare price to fair value of 0.98 is up from 0.87 last quarter, but we still see a few undervalued stocks, including Express Scripts (ESRX), Roche (RHHBY), and  Allergan (AGN).
  • The core of research-and-development productivity at drug firms continues at a steady pace, creating innovative drugs that help to offset some pricing pressures from pharmacy benefit managers.
  • With Donald Trump as president and the Republicans in control of Congress, we expect a high degree of political effort calling for the repeal of the Affordable Care Act (ACA), but major healthcare changes seem unlikely as the ACA has provided millions with healthcare insurance that will be difficult to strip away.
  • Redeployment of capital by the large healthcare companies continues to drive valuations with a focus on mergers and acquisitions, stock buybacks, and steady dividends.

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