Is the US Healthcare Industry Undervalued Now? Main Considerations Before Investing.

US healthcare stocks industry analysis

US healthcare stocks shot up to all time highs during the Covid-19 pandemic season with the accelerated spending and investments into the healthcare sector. Yet in recent times as we enter into post-pandemic times, the healthcare sector seems to have taken a big hit in their valuations.

For medical insurance providers, top management actually announced that operating costs where likely to increase due to backlog of non-critical treatments that were delayed during the Covid-19 period. Naturally, costs are expected to rise for these copmanies.

Main Types of Healthcare Company Stocks

  • Medical Devices – companies that manufacture medical equipment and supply them to hospitals, research, development.
  • Medical Services – hospital operators, managed care facilities
  • Managed Care / Health Insurance(UNH, ELV, CVS, CI) – offer health insurance plans for individuals & employers as well as managed care services
  • MedTech (ABT, ISRG, MDT, SYK) – companies that develop new technologies and software in the healthcare market
  • Leading BioPharma (PFE, MRK, BMY, LLY, AZN) – companies that manufactur drugs and treatment.

Healthcare Sector Performance Comparison With S&P

S&P sector historical returns

Healthcare is actually one of the sectors that I’m closely monitoring and actively interested in, given that historically it’s been known to outperform the S&P’s returns of around 8.80%.

With the decline of Healthcare stock prices, I’m watching very closely to identify any good buying opportunities with good growth potential.

Pros for Investing in Healthcare

Resilient to Economic Swings & Recession

Healthcare stocks have generally been known to be “recession-proof” as they provide an essential service that is required regardless of the economic situation. The sector has historically performed well in recession.

Healthcare Demand Is Consistently On the Rise

local and federal expenditure on public health chart

With an increasingly aging population, the demand for healthcare over the years have seen a very consistent rise and holds good future growth prospects for investors.

Major Risks of the US Healthcare Sector

Political Risk (Regulations)

One of the biggest risks for the healthcare is actually the risk of government regulations. There are several legislators with the view that these large healthcare conglomerates should be broken up further in order to prevent large unchecked monopolies in the industry.

In the past year, there have been several attempts by legislators to block acquisitions and mergers (like UnitedHealth’s acquisition of Change Healthcare1 – although it was eventually dropped).

2024 US Presidential Election

Before investing in the healthcare sector, one should understand the relationship between healthcare and the administration as large amounts of money from big healthcare companies go into funding political campaigns as well. The upcoming presidential elections will also present much volatility for the healthcare sector which is expected to start rising as the Novemeber elections get closer.

Unsustainable Rising Healthcare Costs

The cost of providing healthcare in the US have been steadily rising which is causing alot of dissentment amongst the general public. Many have called for stronger regulations and for the government to take action to bring the cost of healthcare down. This will put significant pressure on medical services providers and may also contribute to lower margins.

Stocks that I’m looking at

Managed Care

I’m very interested in Managed Care providers because most Americans actually get their healthcare through MCOs. Insurance copmanies set up the managed care framework that minimize costs for health benefits providers and give their plan participants incentives to control healthcare expenses. Essentially, they are managing the entire healthcare provision for their clients.

These are typically the biggest players in the market with strong financial growth and stable margins.

UnitedHealth Group Inc (UNH)

UNH Price Chart

UNH is a giant in the healthcare industry with very strong financials and diversified income streams. They are one of the top medical insurance providers in the USA and are sitting on so much spare cash they are basically turning to multiple acquisitions to expand their business. I believe their recent acquisition of Optum’s health services was a good strategic decision for long-term business growth.

Revenues and FCF has been rising steadily year on year. I picked up the stock during the september dip with a cost basis of $461.88 per stock at around 7% of my portfolio allocation. At this point we’re sitting on a nice 11% unrealized gain.

My DCF valuation based on what I consider to be really conservative estimates was actually close to $600, so to me it was really undervalued at the time. With a 1.46% dividend yield and good dividend growth, I’m comfortable holding this stock for another few years. But I would probably sell if the market surges up close to the $580 mark and either wait for a dip to buy in again or reinvest in other stocks with larger growth potential.

Current Thesis

  • Cost basis – $461.88
  • Price reach $580 – Sell
  • Price reach $460 – Add to Position
  • Meanwhile – Hold for dividends
  • My DCF Valuation – $576.04
  • Valuation – Undervalued, potential to hit 25% profit of cost basis
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