Despite a challenging year for healthcare stocks, analysts and investors are optimistic about the sector's prospects in 2024. Over the past few months, healthcare stocks have begun to show signs of a rebound.
For investors looking to capitalize on this opportunity, the key is to identify stocks that have underperformed but present potential buying opportunities.
To uncover these undervalued gems, we conducted a thorough analysis of the S&P 500 Healthcare sector index. Our screening focused on stocks that had declined by at least 10% by December 18th. Amongst these stocks, we identified six that traded significantly below their average analyst target prices, as determined by FactSet.
The goal was to pinpoint stocks that experienced sharp selloffs yet still maintained positive sentiments from Wall Street experts regarding future growth potential.
Among the stocks that met our criteria are renowned Covid-19 vaccine manufacturer, Moderna, as well as Bio-Rad Laboratories, a company that specializes in producing tools for the life sciences industry. Additionally, health insurers Humana and Cigna Group also made the cut.
As of December 18th, the S&P 500 Healthcare sector index had declined by 1.5% for the year, while the broader S&P 500 index surged ahead by 23.5%. The significant underperformance of healthcare stocks can be attributed to various factors, such as concerns over drug-price reform, impending patent cliffs, the impact of higher interest rates, and the remarkable performance of tech stocks that bolstered the overall index.
However, there is reason to believe that some of these trends may reverse in the coming year. The potential for lower interest rates could inject vitality into the biotech and pharmaceutical sectors. Additionally, experts suggest that drug-price reform is already factored into current market levels.
With opportunities for growth on the horizon, 2024 could be a year of resurgence for healthcare stocks. Investors looking to make informed decisions should keep a close eye on these undervalued stocks.
Mixed Bag of Stocks
The stocks that underwent our careful screening process present a diverse range of outcomes. Moderna, in particular, would need a series of favorable developments in its pipeline to achieve the significant outperformance hinted at by the average target price. However, given its recent volatility, it's not out of the realm of possibility for a string of positive news to reignite investor interest in the company.
Bio-Rad, on the other hand, has experienced a decline of over 50% since mid-2021, mirroring the broader downturn in the biotechnology sector it serves. If a resurgence in biotech stocks takes place due to lower interest rates, this could prove beneficial not only for Bio-Rad but also for other manufacturers of life-science tools.
Joining the list of screened stocks are two pharmaceutical companies, Bristol Myers Squibb and Incyte. Both these companies face challenging patent cliffs in the near future.
Despite the impending patent expirations for Incyte, analysts maintain an optimistic outlook on its shares. In a note dated December 13, Leerink Partners analyst Andrew Berens upgraded Incyte stock from Market Perform to Outperform. Berens also increased his target price from $65 to $78. He expressed confidence in the company's robust research and development operations under its new head.
"With a renewed focus on leveraging its dominance in myeloproliferative diseases, it seems that the company has successfully redirected its efforts," wrote Berens.
The remaining stocks that have successfully passed our screening are health insurers Humana and Cigna. Both stocks encountered turbulence in recent weeks due to rumors of a potential merger between the two companies. However, Cigna recently ended its pursuit of Humana, causing fluctuations in their respective stock prices.
