Over the years, especially the past three, I have become more cautious about the technology sector’s blatant overvaluation. Nevertheless, it is difficult to ignore the capabilities of companies such as Nvidia (NASDAQ:NVDA) and their innovative solutions for AI. Although, in my opinion, the market’s optimism has still led to high valuations. This is why I am shifting my focus to undervalued healthcare stocks as a means of protecting myself from the overvaluation of the technology sector.
I think that the healthcare market overall is undervalued since we’re gone through a couple of cycles into very high-growth assets such as in the Nasdaq and Bitcoin (BTC-USD), which rose 78.94% and 522.11%, respectively over the past five years. Comparatively, ETFs like the Vanguard Health Care ETF (NYSEARCA:VHT) rose just 55.73% over the same period, which to me indicates there’s a good amount of potential left in the market.
So here are three undervalued healthcare stocks for investors to buy this month.
Novartis AG (NVS)
Novartis (NYSE:NVS) is a global healthcare company that has great potential moving forward. It has risen 9.41% year-to-date and has momentum on its side, offering both capital appreciation and income potential benefits.
Thus, I think Novartis is one of the best healthcare stocks that any dividend growth investor should have in the portfolio. The quarter one results of the company are quite good where the company has beaten the revenue and earnings per share (EPS) estimates. To me this shows the strength of its pipeline as well as its commercial ability.
The group’s core growth products such as Entresto, Cosentyx, Kesimpta, Kisqali and Leqvio are performing well. Since these brands are newer, it was revealed they are more than strong enough to prevent the erosion of its older product base, which will keep its earnings and free cash flow coming to support its impressive shareholder yield at 6.44%, which is above the industry average.
HCA Healthcare (HCA)
HCA Healthcare (NYSE:HCA) operates hospitals and surgery centers in the U.S. and the U.K.
For some context, HCA Healthcare is one of the companies that I am now very positive about and I think the reward constitutes the risk at this point. HCA’s good performance in the Q1 with high revenue growth, increasing demand, and widening margins prove that HCA is a well-positioned company.
It was revealed in last quarter’s results that HCA’s deferred procedures are reducing at a rapid rate as pent-up demand is being released. This is a continued blowback from COVID, and I think we’re seeing a revitalization in demand for operating procedures as we did for air travel when restrictions were first lifted. For example, same-facility admissions were up a staggering 6.2% in Q1.
Total healthcare spending is still far behind where it was during the pandemic, so I believe that traditional hospitals such as HCA will see a rise in demand as spending normalizes.
Pfizer (PFE)
Pfizer (NYSE:PFE) is one of the largest pharmaceutical companies globally.
What really interests me is the oncology segment and the opportunities for Pfizer. The Seagen acquisition was a turning point, it more than doubled Pfizer’s presence in this fast-growing segment. Pfizer knows what it is doing by shifting its focus to biologics (drugs made from living organisms) because they have longer market protection than what is seen with older drugs.
Pfizer also has a healthy pipeline with more than 100 programs in the pipeline of which 37 are in the final stage of development. The firm’s scale and resources are unparalleled, which gives it a competitive edge in research and development as well as commercialization.
PFE’s stock price has fallen 20.37% over the past year, which may be concerning. However, I see an opportunity, as investors can snap up a 5.86% dividend yield at these prices while they wait for the oncology segment to ramp up PFE’s earnings.
Gilead Sciences (GILD)
Gilead Sciences (NASDAQ:GILD) focuses on antiviral drugs. Also, like other undervalued healthcare stocks, GILD’s stock price has turned negative, dropping 8.39% over the past year.
There is one major bright spot, however, and that is Gilead’s HIV business which remains a cash cow and should continue to grow. The new Phase 3 data for lenacapavir is a game-changer because it was shown to be 100% effective in preventing HIV in cisgender women during trials. The biennial dosing of lenacapavir puts it ahead of other rivals that require more aggressive dosing, and I believe that its peak estimated sales of $3 billion has not been fully reflected in the market price.
On paper, GILD also looks cheap at its current fundamentals. In fact, there’s a massive mismatch between its trailing and forward earnings, at a staggering 199x and 9.8x, respectively. Analysts then have very bullish forecasts for the company, and I believe that these forecast are well-deserved.
Medtronic (MDT)
Medtronic (NYSE:MDT) is a leading medical device company. I think it’s one of those undervalued healthcare stocks for a few different reasons. Firstly, around 80% of MDT’s revenue is derived from recurring sources, which makes it less sensitive to macroeconomic conditions and should be assumed to be easier to value due to there being less variance in its financials quarter-over-quarter.
MDT is also relatively cheap with a forward P/E ratio of 14x which is far lower than that of S&P 500 at 27x as well as other companies in the medtech industry. The stock presents a good mix of economic stability, capital appreciation potential, as well as income potential. MDT has steadily grown its dividend since its inception and has 48 years of growth behind it.
Companies like MDT that have this trifecta could become important anchor stocks in the event of a stock market correction for growth darlings such as NVDA, especially as it offers a low beta, income, and a relatively undervalued share price compared to the broader market.
Abbott Laboratories (ABT)
Some undervalued healthcare stocks on this list struggled severely post-COVID, but this is not the case with Abbott Laboratories (NYSE:ABT), a diversified global healthcare company. The company did suffer headwinds from lower COVID-19-test sales but its base business and ex-COVID delivery grew over 10% organically for the fifth quarter in a row.
Abbott is one of the stocks that is supported by the ongoing bull market and the shareholder returns are one of the reasons for this. It pays a dividend that has grown for 50 consecutive years, but what really puts Abbott in a class of its own is the rate of dividend growth. Based on the 5-year dividend CAGR of more than 12%, and the moderately conservative payout ratio of about 48%, it would be reasonable to expect high single digit increases to be sustained into the future.
ABT’s dividend at around 2% might not be enough for those seeking immediate, substantial income, but its growth rate could be very appealing for those who have a time horizon of 20 years or more to allow compounding to work its magic.
Tenet Healthcare (THC)
Tenet Healthcare (NYSE:THC) operates hospitals and other healthcare facilities in the U.S. THC has very strong momentum behind it, having risen over 60% over the past year alone. There are a few things to unpack in order to understand the thesis for THC.
Tenet’s decision to offload non-core assets, in this case underperforming hospitals, has been welcomed by the market as a strategic move. These divestitures have delivered a substantial amount of proceeds (over $2.5 billion after-tax) and at the same time, these divestitures helped Tenet to divest low-margin, capital-intensive businesses and to re-allocate resources to the faster growing, more profitable lines of businesses including ambulatory surgery centers (ASCs). This is a positive sign of management’s intent to find new opportunities to deploy this capital for higher returns in the future.
The rotation of capital back to more profitable assets is one of the key reasons I think THC is still undervalued despite trading at 16 times forward earnings, but it may take some time in order for the company to reap the synergies it seeks from the assets.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
