In this article, we will take a look at the 13 most undervalued healthcare stocks to buy according to hedge funds.
According to a report by T.Rowe Price, healthcare stocks can be generally divided into two categories. The first is high-growth stocks from the life sciences and biotechnology segments. These companies are promising breakthrough therapies, have high valuations and aggressive growth models. However, investing in these stocks is not without risk and volatility. The second category comprises major pharmaceutical companies that are mature and considered as defensive plays. Earnings growth expectations for these companies are more “modest but also expected to be more consistent from quarter to quarter,” the report added. The report also gave some practical advice to investors when it comes to healthcare stocks:
“If you are a disciplined long-term investor, health care stocks may be a good addition to the aggressive part of your equity portfolio. For example, of the equity portion of a well- diversified portfolio, 20% might be in health care.”
The Bull Case for the US Healthcare Industry
A team of Morgan Stanley analysts highlighted the bull case for the US healthcare sector in a 2019 report. The report said that the US healthcare sector has outperformed broader markets over the past 45 years. Most importantly, the report said that the sector has outperformed during five of the last six recessions, that too by 9% on average. This makes the healthcare sector worthy of investors’ attention as we are in the middle of a recession scenario that is becoming likely by the day amid persistent inflation and the Federal Reserve’s rate hikes.
The Morgan Stanley report highlighted that unlike other sectors, the healthcare sector’s underperformance tends to be short-lived.
The report also said that the healthcare sector in the US is undervalued relative to other defensive sectors. The sector, according to the report, trades at a 17% discount to the average of staples and utilities forward P/E ratios.
Our Methodology
For this article, we scoured the Insider Monkey’s database of 943 hedge funds’ holdings and picked top 13 healthcare stocks with PE ratios (trailing or forward) under 15 as of February 22 with highest number of hedge fund investors. The idea was the pick the most favorite undervalued healthcare stocks of elite hedge funds. The list is ranked in ascending order of the number of hedge fund investors.
Most Undervalued Healthcare Stocks To Buy According To Hedge Funds
13. Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI)
Number of Hedge Fund Holders: 22
California-based Maravai LifeSciences Holdings, Inc. (NASDAQ:MRVI) ranks 13th in our list of the most undervalued healthcare stocks to buy according to hedge funds.
Insider Monkey’s database of elite hedge funds shows that 22 funds reported owning stakes in Maravai LifeSciences Holdings, Inc. at the end of the fourth quarter of 2022. The biggest stakeholder of Maravai LifeSciences Holdings, Inc. out of these funds was Paul Marshall and Ian Wace’s Marshall Wace LLP which had a $39 million stake in the firm.
In Q4, Maravai LifeSciences Holdings, Inc.’s EPS came in at $0.35, surpassing estimates by $0.01. Revenue however fell 10.4% on a YoY basis to $204.7 million, missing estimates by $0.25 million.
12. QuidelOrtho Corporation (NASDAQ:QDEL)
Number of Hedge Fund Holders: 33
California-based QuidelOrtho Corporation (NASDAQ:QDEL) makes diagnostics products. Recently, QuidelOrtho Corporation posted strong Q4 results. Adjusted EPS in the quarter was $1.76, beating estimates by $0.34. Revenue in the period jumped about 36% on a YoY basis to reach $866.5 million, beating estimates by $90.69 million.
QuidelOrtho Corporation said that for 2023 it expects adjusted EPS in the range of $5.00-$5.60. The consensus estimate for this figure was $5.19. Revenue was expected to come in the range of $2.8 billion to $3.1 billion, versus the consensus estimate of $2.81 billion. QuidelOrtho Corporation said that it expects to deliver high-single-digit top-line growth over the long term.
A total of 33 hedge funds tracked by Insider Monkey reported owning stakes in QuidelOrtho Corporation as of the end of the fourth quarter of 2022. The total value of these stakes was $720 million. The biggest stakeholder of QuidelOrtho Corporation during this period was
Meridian Funds made the following comment about QuidelOrtho Corporation in its Q3 2022 investor letter:
“QuidelOrtho Corporation (NASDAQ:QDEL) is a global leader in the diagnostics industry. The merger of Quidel and Ortho Clinical Diagnostics has resulted in a top 10 player in the in-vitro diagnostics industry, combining Quidel’s strong point of care platform with Ortho’s blood chemistry and transfusion platform. We believe the new company will be much more consistent in its ability to deliver steady top-line growth at attractive margins to fuel free cash flow growth. Further boosting our conviction in QuidelOrtho is its robust product pipeline. Pipeline developments include the company’s Savanna platform, which solves a long-term need for near-patient molecular testing that is accurate, fast, and economical. We believe the stock weakness is due to the anticipated decline in COVID-19 testing. However, we believe the long-term earnings and free cash flow profile are underappreciated, and as a result we increased our position in the stock.”
11. BioNTech SE (NASDAQ:BNTX)
Number of Hedge Fund Holders: 34
BioNTech SE (NASDAQ:BNTX) saw a jump in hedge fund sentiment during the fourth quarter, as Insider Monkey’s propritery database of 943 hedge fund holdings shows that 34 hedge funds ended the fourth quarter with BNTX in their portfolios, compared with 18 hedge funds in the previous quarter. The biggest hedge fund stakeholder of BioNTech SE at the end of 2022 was Philippe Laffont’s Coatue Management which had a stake worth over $93 million in the company.
BioNTech SE and Pfizer recently announced that they have submitted applications seeking FDA approval to use Omicron-adjusted vaccine as a primary series or a booster dose in people aged 12 years and above.
Artisan Partners made the following comment about BioNTech SE in its Q3 2022 investor letter:
“BioNTech SE (NASDAQ:BNTX) is a leading biotech company focused on developing immunotherapies to treat cancer and other serious diseases. Over the past year, we trimmed our position significantly as we believed the stock’s valuation failed to reflect the windfall nature of COVID-19 vaccine cash flows. With the stock nearly 70% off its highs and, more importantly, at a reasonable discount to our PMV estimate, we view the valuation as opportunistic given its long-term profit cycle potential. BioNTech’s intellectual property in mRNA, and COVID funded manufacturing capacity leave it well-positioned to develop new mRNA vaccines and cancer therapies. In addition, the company has non-mRNA technology (e.g., cell therapy assets) and blue-chip partnerships offering additional optionality. While the company’s R&D pipeline beyond COVID-19 vaccines will take some time to mature, it is well funded by close to $20 billion in COVID-vaccine proceeds. We increased our position within the GardenSM as the stock declined.”
10. DaVita Inc. (NYSE:DVA)
Number of Hedge Fund Holders: 34
DaVita Inc. (NYSE:DVA) is known for its kidney dialysis services. Insider Monkey database of 943 hedge fund holdings shows that 34 funds had invested in DaVita Inc. as of the end of the fourth quarter of 2022, up from 30 hedge funds in the previous quarter. The total value of these stakes at the end of December 2022 was close to $3 billion. The biggest hedge fund stakeholder of DaVita Inc. was Warren Buffett’s Berkshire Hathaway.
The Colorado-based company recently posted its fourth-quarter results. Adjusted EPS in the quarter came in at $0.59, while revenue totaled $2.92 billion. Operating income in the quarter came in at $256 million. Adjusted operating income in the quarter was $317 million.
Some other notable stocks hedge funds are piling into from the healthcare sector include Pfizer Inc. (NYSE:PFE), The Cigna Group (NYSE:CI) and Moderna, Inc. (NASDAQ:MRNA).
Moon Capital made the following comment about DaVita Inc. in its Q4 2022 investor letter:
“During the fourth quarter, we purchased shares in DaVita Inc. (NYSE:DVA), a dialysis center operator. For those unfamiliar, kidney dialysis involves the critical removal of toxins, fluids and salts from the blood by artificial means. Roughly 500,000 patients receive kidney dialysis in the U.S., which requires a 3.5-hour treatment three times a week. The only alternatives to the treatments are a kidney transplant or potential fatality. Given the critical nature of its services, demand has little correlation with the overall economy, resulting in a highly recession resistant business.
The U.S. dialysis industry is highly concentrated, with two companies (DaVita and its competitor Fresenius) controlling a combined 80% of the $25 billion market. The dominance of this duopoly provides massive scale advantages, making it incredibly difficult for new entrants to gain profitable market share.
In the past, DaVita’s valuation has been penalized (we view unfairly) because the company generates a significant portion of its operating income from a small percentage of its patients. Of DaVita’s 200,000 patients, approximately 90% qualify for Medicare (or Medicaid), with the remaining 10% covered by a commercial insurance provider. While commercial insurers pay an average of $1,000 per treatment, the federal government’s pay rate for Medicare and Medicaid is only $275 – which is actually less than what it costs DVA to provide the treatment…”(Click here to read the full text)
9. AMN Healthcare Services, Inc. (NYSE:AMN)
Number of Hedge Fund Holders: 35
Texas-based temporary healthcare staffing company AMN Healthcare Services, Inc. (NYSE:AMN) ranks 9th in our list of the most undervalued healthcare stocks to buy according to hedge funds. AMN Healthcare Services, Inc. was owned by 35 hedge funds at the end of the fourth quarter of 2022, according to Insider Monkey’s database of 943 hedge funds. The biggest hedge fund stakeholder of AMN Healthcare Services, Inc. during this period was Steve Cohen’s Point72 Asset Management which had a stake worth about $93 million in the company.
Recently, AMN Healthcare Services, Inc. posted Q4 results according to which its adjusted EPS in the period came in at $2.48, beating estimates by $0.29.
Diamond Hill Capital made the following comment about AMN Healthcare Services, Inc. in its Q3 2022 investor letter:
“New positions initiated in Q3 included Ciena Corporation (long), AMN Healthcare Services, Inc. (NYSE:AMN) (short), CBIZ Inc (short), Asana (short) and Palomar (short). AMN Healthcare Services provides workforce solutions and staffing services at healthcare facilities. An unstable healthcare employment environment is driving pricing and volume growth for contract labor, which we believe is unsustainable.”
8. Organon & Co. (NYSE:OGN)
Number of Hedge Fund Holders: 37
New Jersey-based pharmaceutical company Organon & Co. ranks 8th in our list of the most undervalued healthcare stocks to buy according to hedge funds. At the end of the last quarter of 2022, 37 hedge funds had stakes in Organon & Co.. The total worth of these stakes was about $396 million. The most notable hedge fund stakeholder of Organon & Co. was Steven Boyd’s Armistice Capital which had a $67 million stake in the company.
Organon & Co. was under pressure in February after the company posted weak Q4 results. Adjusted EPS in the quarter came in at $0.81, missing estimates by $0.10. Revenue in the quarter fell 6.9% on a YoY basis to $1.49 billion, missing estimates by $10 million. For full-year 2023 Organon & Co. expects revenue in the range of $6.15 billion to $6.45 billion, versus the consensus of $6.32 billion.
Miller Value Partners made the following comment about Organon & Co. in its Q3 2022 investor letter:
“Organon & Co. (NYSE:OGN) was the top detractor for the quarter, falling 30.0%2. Organon reported 2Q22 revenue of $1.59 billion, -0.6% Y/Y, ahead of consensus of $1.54 billion, and Adjusted EPS of $1.25, -27.3% Y/Y, in-line with analyst expectations. Adjusted EBITDA for the quarter came in at $512 million (32.3% margin), compared to 2Q21 Adjusted EBITDA of $627 million (39.3% margin). Management revised FY22 guidance for revenue of $6.1-6.3 billion, compared to previous guidance for revenue of $6.1-6.4 billion, to reflect persisting foreign exchange (FX) headwinds, and Adjusted EBITDA margin of 32-34%, compared to prior guidance for a margin of 34-36%, which incorporates ~$110 million of in-process research and development (IPR&D) and milestone expenses from business development. Management’s guidance implies FY22 Adjusted EBITDA of $2.05B, at the respective midpoints, or an Enterprise Value (EV)/EBITDA multiple of ~7.0x.”
7. GSK plc (NYSE:GSK)
Number of Hedge Fund Holders: 39
Of the 943 hedge funds tracked by Insider Monkey, 39 hedge funds had stakes in GSK plc (NYSE:GSK) at the end of the fourth quarter of 2022. The biggest stakeholder of GSK plc (NYSE:GSK) among these hedge funds was Steve Cohen’s Point72 Asset Management $227.4 million. Other healthcare stocks hedge funds like include Pfizer Inc., The Cigna Group and Moderna, Inc..
Recently, the US FDA granted full approval to GSK plc (NYSE:GSK)’s Jemperli (dostarlimab-gxly) for the treatment of certain patients with a type of endometrial cancer. Similarly, the FDA also recently approved GSK plc (NYSE:GSK)’s oral therapy Jesduvroq (daprodustat) to treat anemia due to chronic kidney disease (CKD) in adults who have been receiving dialysis for at least four months.
Ariel Investment made the following comment about GSK plc (NYSE:GSK) in its Q3 2022 investor letter:
“By comparison, health care leader GSK plc (NYSE:GSK) was the largest detractor from performance in the quarter. Investors are concerned about legal liabilities associated with its antacid drug Zantac. While it is impossible to know the outcome with certainty, our preliminary assessment suggests that the decline in market capitalization exceeds the likely financial impact on the company.”
6. Bausch Health Companies Inc. (NYSE:BHC)
Number of Hedge Fund Holders: 41
Canadian specialty pharmaceutical company Bausch Health Companies Inc. (NYSE:BHC) ranks 6th in our list of the most undervalued healthcare stocks to buy according to hedge funds. Recently, Bausch Health Companies Inc. posted its Q4 results. GAAP EPS in the period came in at -$1.13. Revenue in the quarter remained flat on a YoY basis at $2.2 billion, beating estimates by $60 million.
Some notable hedge fund stakeholders of Bausch Health Companies Inc. at the end of the fourth quarter included John Paulson’s Paulson & Co ($166 million stake), Steven Tananbaum’s GoldenTree Asset Management ($134 million stake) and Sander Gerber’s Hudson Bay Capital Management (72 million stake).
In the next part we will take a look at some more famous undervalued healthcare stocks, including Pfizer Inc., The Cigna Group and Moderna, Inc..
5. Moderna, Inc. (NASDAQ:MRNA)
Number of Hedge Fund Holders: 52
Moderna, Inc. shares are in the limelight as investors look for catalysts beyond the COVID-19 vaccine. Recently, the US FDA gave Breakthrough Therapy status to Moderna, Inc. and Merck’s (NYSE:MRK) personalized mRNA cancer vaccine mRNA-4157/V940, in combination with Keytruda, for the adjuvant treatment of patients with high-risk melanoma after complete resection.
Recently, Moderna, Inc. posted its Q4 results. GAAP EPS in the period came in at $3.61, missing estimates by $1.14. Revenue in the quarter fell 29.3% on a YoY basis to $5.1 billion but beat estimates by $80 million.
Hedge fund sentiment for Moderna, Inc. spiked in Q4. At the end of the quarter, 52 hedge funds in Insider Monkey’s database of 943 hedge funds reported owning stakes in Moderna, Inc., up from 44 hedge funds in the previous quarter. The total value of these stakes was over $3.1 billion.
ClearBridge Select Strategy made the following comment about Moderna, Inc. in its Q4 2022 investor letter:
“Moderna, Inc. (NASDAQ:MRNA) became a household name during the pandemic as one of the first developers of a COVID-19 vaccine. But the stock sold off sharply as COVID momentum, including high expectations for booster shots, began to wear off, causing investors to slash its fiscal 2023 earnings estimates by two-thirds over the last year. We believe those downward revisions clouded the prospects for the company’s fully funded pipeline of platform opportunities, including cancer, RSV and flu. The cash-rich company also recently expanded its partnership with Merck to improve cancer treatments.”
4. HCA Healthcare, Inc. (NYSE:HCA)
Number of Hedge Fund Holders: 64
Healthcare facilities operator HCA Healthcare, Inc. (NYSE:HCA) ranks 4th in our list of the most undervalued healthcare stocks to buy according to hedge funds. In January, HCA Healthcare, Inc. posted mixed Q4 results. GAAP EPS in the quarter came in at $7.28, easily beating estimates by $2.48. Revenue in the period jumped about 2.9% on a YoY basis to reach $15.5 billion but missed estimates by $130 million.
Adjusted EBITDA in the quarter totaled $3.179 billion. Cash flows from operating activities came in at $2.527 billion. For 2023, HCA Healthcare, Inc. expects its revenue to come in between $61.5 billion to $63.5 billion versus the consensus estimate of $62.80 billion.
Diamond Hill Large Cap Strategy made the following comment about HCA Healthcare, Inc. in its Q4 2022 investor letter:
“HCA Healthcare, Inc. (NYSE:HCA)’s stock price continued to advance in Q4 following a difficult first half of 2022. Fortunately, we did not own shares until the end of Q2. Two major factors that are top of mind for investors right now are volumes and labor constraints, both of which continue to normalize albeit at a relatively slow pace. We remain favorable on the longterm fundamentals of the business and the opportunity for HCA to reinvest the large amounts of cash it generates at attractive returns. That said, the discount to our intrinsic value estimate has narrowed significantly following robust returns in the second half of the year.”
3. Biogen Inc. (NASDAQ:BIIB)
Number of Hedge Fund Holders: 75
Massachusetts-based Biogen Inc. (NASDAQ:BIIB) ranks 3rd in our list of the most undervalued healthcare stocks to buy according to hedge funds. With a PE ratio under 15 and 75 hedge fund investors as of the end of the fourth quarter, Biogen Inc. seems to have strong growth potential and investor sentiment.
In February, Biogen Inc. posted Q4 results. Adjusted EPS in the quarter totaled $4.05, beating estimates by $0.57. Revenue in the quarter fell 7.3% on a YoY basis to reach $2.54 billion, beating estimates by $100 million.
ClearBridge Investments made the following comment about Biogen Inc. in its Q3 2022 investor letter:
“Biogen Inc. (NASDAQ:BIIB) was the leading contributor among several biopharma names, boosted by positive, pivotal clinical data for its next-generation Alzheimer’s treatment Lecanemab. In a pivotal trial, the drug proved safe and efficacious in slowing progression of Alzheimer’s disease.”
2. Pfizer Inc. (NYSE:PFE)
Number of Hedge Fund Holders: 75
Pfizer Inc. remains one of the most favorite healthcare stocks among the elite hedge funds in financial markets. Pfizer Inc. is moving beyond just the COVID-19 vaccines as the company has much to offer in terms of its pipeline to long-term investors. Recently, Pfizer Inc. announced that the FDA accepted its Biologics License Application (BLA) for its respiratory syncytial virus (RSV) vaccine candidate PF-06928316 for priority review. The treatment targets pregnant women for the prevention of RSV in infants.
As of the end of the fourth quarter of 2022, 75 hedge funds tracked by Insider Monkey reported owning stakes in Pfizer Inc.. The net worth of these stakes was about $2.5 billion.
Diamond Hill Capital made the following comment about Pfizer Inc. in its Q3 2022 investor letter:
“Also among our bottom contributors were health care products manufacturer Abbott Labs, global pharmaceutical company Pfizer Inc. (NYSE:PFE), media and technology giant Alphabet, and insurance company American International Group (AIG). Although Pfizer continues to report strong performance of its core drugs, sales of its COVID vaccine and treatment have likely peaked and sales are expected to decline going forward. We remain optimistic about the company long term as we believe management is taking the company in the right direction, focusing R&D, and making strategic acquisitions with profits generated from COVID vaccine sales.”
1. The Cigna Group (NYSE:CI)
Number of Hedge Fund Holders: 76
The Cigna Group shares have gained about 31% over the past year. Still, The Cigna Group looks undervalued as its PE ratio is under 15 as of February 24. Recently, The Cigna Group made its shareholders happy when it upped its dividend by 10%. Cigna announced a quarterly dividend of $1.23 per share. The dividend is payable on March 23.
At the end of the last quarter of 2022, 76 hedge funds in Insider Monkey database reported owning stakes in The Cigna Group. The total value of these stakes as of the end of December 2022 was $4.4 billion. The biggest stakeholder of The Cigna Group during this period was Rajiv Jain’s GQG Partners which had a massive $797 million stake in the firm.
Baron Funds made the following comment about Cigna Corporation in its Q4 2022 investor letter:
“We initiated a position in Cigna Corporation (NYSE:CI), a health services organization with two primary segments, Cigna Healthcare and Evernorth. Cigna Healthcare provides health insurance products, including a business in which Cigna provides administrative services only to plan sponsors (employers, unions, and other groups). Evernorth provides a portfolio of health care services, including pharmacy benefit management (PBM) services, care delivery services, data and analytics solutions, and distribution of specialty drugs. Each segment has a portion of business that provides steady, predictable growth. These foundational businesses, which account for roughly 60% of total revenue, include the U.S. commercial business, the PBM business, and international. The other 40% of revenue comes from higher-growth businesses, including the specialty pharmacy business, care delivery services, and Medicare Advantage. Management targets 10% to 13% annual EPS growth over the long term. The stock trades at a significant discount to industry peers because of the company’s commercial health insurance and PBM business mix. We think the PBM business will benefit from the biosimilar wave in the next few years, and as Cigna’s higher growth businesses become a bigger percentage of the overall mix, we think the stock can appreciate at least in line with its annual EPS growth with potential for valuation expansion.”
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This article is originally published at Insider Monkey.
