14 Most Undervalued Healthcare Stocks To Buy According To Hedge Funds
In this article, we discuss the 14 most undervalued healthcare stocks to buy according to hedge funds. To skip the detailed analysis of the healthcare industry, go directly to the 5 Most Undervalued Healthcare Stocks To Buy According To Hedge Funds.
The indispensable nature of the healthcare industry makes it an ever-growing industry. According to our previous report, the global Healthcare Services market was valued at $10.30 trillion in 2021 and is expected to grow at a CAGR of 8.27% between 2023 and 2030. By 2030, the healthcare sector is expected to be worth $21.06 trillion.
While the COVID-19 pandemic proved to be a major headwind for most industries, the healthcare industry remained resilient despite highlighting the weaknesses in the global medical supply chains. Between January 2020 and December 2021, some of the most prominent names in the healthcare industry showed remarkable gains in their stock prices. Take the example of Moderna, Inc. (NASDAQ:MRNA) which showed nearly 1,245% stock price gain between January 1, 2020 and December 31, 2021. Other healthcare stocks such as UnitedHealth Group Incorporated (NYSE:UNH) and Pfizer Inc. (NYSE:PFE) also experienced a healthy gain of over 73% and 60%, respectively. There are a few reasons for Moderna, Inc. (NASDAQ:MRNA)’s sudden stock surge which include its mRNA technology-based vaccines during the pandemic and its addition to the S&P 500 in July 2021.
Moreover, even in 2022, when the global economy was in shambles, the healthcare industry was able to show some resilience. By the end of the year, while the NASDAQ composite and the S&P 500 showed a decline of 33% and 19.5%, the Health Care Select Sector SPDR Fund closed out the year with merely a 3.5% decline. According to BlackRock, Inc. (NYSE:BLK)'s data, healthcare stocks were around 23% less volatile than the rest of the market.
As we talked about the technological advancements in the industry being a significant growth prospect for the industry, the latest surge in the artificial intelligence (AI) industry is expected to be quite bullish for the healthcare sector. According to a Morgan Stanley survey, 94% of healthcare companies said they employ AI or machine learning (ML) in some capacity. The firm added that the estimated budget allocation to AI/ML technologies is expected to grow from 5.7% in 2022 to 10.5% in 2024. The global AI in healthcare market was valued at $137 billion in 2023 and is expected to reach over $181 billion in 2030.
Some other technological advancements that have proven to be beneficial for the healthcare segment are telehealth, remote monitoring, and cloud management services. The pandemic was key to showing the productivity and effectuality of these technologies. Even though the effects of the pandemic are fading away, telehealth is still a growing market in the healthcare sector. We previously reported that the telehealth market was valued at $48.3 billion in 2022 and is expected to reach $57.1 billion by the end of this year.
The innovations in healthcare along with the growing consumer rate due to an aging population are making bullish cases for the healthcare industry. Despite the weak margins due to high labor costs, the industry is expected to show significant changes over the decade, which brings good news for investors. For people looking to invest in the healthcare sector, some of the most undervalued healthcare stocks according to hedge funds include UnitedHealth Group Incorporated (NYSE:UNH), Thermo Fisher Scientific Inc. (NYSE:TMO), and Danaher Corporation (NYSE:DHR).
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Our Methodology
For this list of the 14 most undervalued healthcare stocks to buy according to hedge funds, we made a list of healthcare stocks with a trailing twelve-month (TTM) price-to-earnings (PE) ratio of under 20. Out of those stocks, we chose all the stocks that had a PE ratio below 10 and for the stocks with a PE ratio above 10, we only chose the ones with notable future growth catalysts. Next, we selected the 14 stocks with the highest number of hedge fund holders as of the second quarter of 2023. We also skipped the stocks whose hedge fund sentiment dropped significantly in Q2.
We listed the stocks in an ascending order of their hedge fund sentiment which was taken from Insider Monkey’s database of 910 elite hedge funds.
Most Undervalued Healthcare Stocks To Buy According To Hedge Funds
14. BioNTech SE (NASDAQ:BNTX)
TTM PE Ratio as of October 26: 5.00
Number of Hedge Fund Holders: 21
BioNTech SE (NASDAQ:BNTX) is a German pharmaceutical company. It co-markets the Comirnaty vaccine for COVID-19 along with Pfizer Inc. (NYSE:PFE). Due to a lower sales volume of COVID-19 vaccines, the company has fallen off to a very attractive valuation. Nevertheless, BioNTech SE (NASDAQ:BNTX) is working on a combination flu-COVID vaccine with Pfizer Inc. (NYSE:PFE) and is in a stage 3 study of evaluating lung cancer with OncoC4. Moreover, the company is working on several mRNA therapies, cell therapies, and protein-based therapeutics which provide significant growth catalysts for BioNTech SE (NASDAQ:BNTX).
In the second quarter, Millennium Management was BioNTech SE (NASDAQ:BNTX)’s most prominent stakeholder with 351,010 shares worth $37.88 million.
Johnson & Johnson (NYSE:JNJ), Elevance Health, Inc. (NYSE:ELV), and The Cigna Group (NYSE:CI) are some of the most undervalued healthcare stocks according to hedge funds along with BioNTech SE (NASDAQ:BNTX).
ClearBridge Investments made the following comment about BioNTech SE (NASDAQ:BNTX) in its first quarter 2023 investor letter:
“In another example, one of the lowest correlating stocks in the portfolio is new holding BioNTech SE (NASDAQ:BNTX), a biotechnology company developing immunotherapies for cancer and other infectious diseases. A very attractive element of any drug stock is that it has idiosyncratic drivers that protect the portfolio from macro shocks and that lower portfolio correlation. In the case of BioNTech, the stock is undervalued due to material drops in its COVID-19 revenues. However, the company has accumulated almost $20 billion in cash and is using its research platform in mRNA and immunology to pursue lucrative opportunities in immuno-oncology and other major disease areas. This massive cash balance curtails our downside, while offering incredibly attractive optionality on the upside.”
13. Patterson Companies, Inc. (NASDAQ:PDCO)
TTM PE Ratio as of October 26: 13.78
Number of Hedge Fund Holders: 25
Patterson Companies, Inc. (NASDAQ:PDCO) is a Minnesota-based healthcare company that supplies products for dental health and veterinary care.
Patterson Companies, Inc. (NASDAQ:PDCO) faced a sell-off after it reported its Q1 FY 24 results in August which brought the company down to an attractive valuation. Wall Street analysts have an average price target of $36.29 for the company, compared to its stock price of $30.18 as of October 26 market close. The average analyst price target shows a 20.245% upside to Patterson Companies, Inc. (NASDAQ:PDCO)’s current price.
In the second quarter, Patterson Companies, Inc. (NASDAQ:PDCO) stock was owned by 25 hedge funds at a combined stake value of $187.675 million, up from 19 hedge funds with shares worth $89.43 million in Q1.
12. Organon & Co. (NYSE:OGN)
TTM PE Ratio as of October 26: 5.31
Number of Hedge Fund Holders: 31
Organon & Co. (NYSE:OGN) is a pharmaceutical company that focuses on reproductive medicine, contraception, psychiatry, hormone replacement therapy, and anesthesia. It became a publicly traded company in June 2021 and is headquartered in New Jersey.
On October 25, Piper Sandler maintained an Overweight rating on Organon & Co. (NYSE:OGN) with a $32 price target, down from $33. Piper Sandler’s price target represents a 109% upside to the company’s stock price of $15.30 on October 26.
Organon & Co. (NYSE:OGN) is one of the most undervalued healthcare stocks as it had a PE ratio of 5.31 on October 26. Furthermore, the company has a 7.4% dividend yield compared to the 1.58% sector average, yet its payout ratio is merely 24.4%.
Miller Value Partners made the following comment about Organon & Co. (NYSE:OGN) in its Q3 2023 investor letter:
“Organon & Co. (NYSE:OGN) reported 2Q23 revenue of $1.61B, +1.5% Y/Y, ahead of consensus of $1.57B, and Adjusted EPS from continuing operations of $1.31, +4.8% Y/Y, well ahead of consensus of $1.00. Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) for the quarter came in at $530MM, or a margin of 33.0%, +66bps Y/Y. Biosimilars revenue increased 14% Y/Y (+15% excluding the impact of foreign currency (ex-FX)), driven by a 20% Y/Y ex-FX increase in Renflexis sales, while the Women’s Health segment saw top-line growth of 8% (+10% ex-FX), driven primarily by Nexplanon sales growth of 12% ex-FX. The company maintained a quarterly dividend of $0.28/share, or an annualized yield of ~6.5%. Management revised FY23 guidance for revenue of $6.35B (vs. prior guidance of $6.30B), and an Adjusted EBITDA margin of 32.3% (vs. prior guidance of 32.0%), at the respective midpoints, implying FY23 Adjusted EBITDA of $2.05B, or an Enterprise Value (EV)/EBITDA multiple of ~6.3x.”
11. AMN Healthcare Services, Inc. (NYSE:AMN)
TTM PE Ratio as of October 26: 9.68
Number of Hedge Fund Holders: 31
AMN Healthcare Services, Inc. (NYSE:AMN) is a Texas-based company that provides workforce and staffing services to healthcare services companies.
AMN Healthcare Services, Inc. (NYSE:AMN) was highly favored by hedge funds in the second quarter of 2023. While the number of hedge fund holders remained the same in the first and second quarters, the combined stake owned by hedge funds increased by 135% to $442.055 million in Q2. Millennium Management increased its stake in the company by 164% in Q2, Citadel Investment Group by 109%, and Point72 Asset Management increased its holdings in AMN Healthcare Services, Inc. (NYSE:AMN) by a whopping 18346%.
On October 23, AMN Healthcare Services, Inc. (NYSE:AMN) announced that it would acquire healthcare staffing company, MSDR for $300 million. MSDR generated a revenue of $104 million in 2022 and as of the announcement date, the company had an annualized revenue of approximately $155 million.
10. GSK plc (NYSE:GSK)
TTM PE Ratio as of October 26: 11.63
Number of Hedge Fund Holders: 35
GSK plc (NYSE:GSK) is one of the world’s largest pharmaceutical and biotechnology companies. It is headquartered in London, UK and its products are sold globally.
In the second week of October, GSK plc (NYSE:GSK) signed a ￡2.5 billion deal with China’s largest vaccine company, Chongqing Zhifei Biological Products. Both companies will co-promote GSK plc (NYSE:GSK)’s shingles vaccine, Shingrix, in China. Chongqing Zhifei will purchase vaccine volumes worth ￡2.5 billion from the company and will hold exclusive rights to import and distribute the vaccine in China starting from January 2024. The deal is signed for a period of 3 years. However, upon agreement of both parties, Zhifei and GSK plc (NYSE:GSK) can extend the deal beyond that.
GSK plc (NYSE:GSK)’ stock was owned by 35 hedge funds in the second quarter and had a PE ratio of 11.63 on October 26, making it the 10th most undervalued healthcare stock to buy according to hedge funds.
9. Universal Health Services, Inc. (NYSE:UHS)
TTM PE Ratio as of October 26: 12.70
Number of Hedge Fund Holders: 38
Universal Health Services, Inc. (NYSE:UHS) is one of the largest hospital management companies in the US. It owns two of the 25 best for-profit hospitals in the US. It was founded in 1979 and is headquartered in Pennsylvania.
In Q2, the number of hedge funds with a stake in Universal Health Services, Inc. (NYSE:UHS) increased to 38 from 30 in Q1. First Eagle Investment Management was the company’s biggest stakeholder with 4.686 million shares worth $739.338 million.
On October 25, Universal Health Services, Inc. (NYSE:UHS) posted Q3 non-GAAP EPS of $2.55, outperforming the analyst estimates by $0.19. Additionally, its Q3 revenue was up 6.6% YoY to $3.56 billion, compared to the analyst estimates of $3.36 billion.
Here is what First Eagle Investments said about Universal Health Services, Inc. (NYSE:UHS) in its Q2 2022 investor letter:
“Hospital and healthcare service provider Universal Health Services, Inc. (NYSE:UHS) underperformed after the company lowered its full-year guidance because of lower patient volumes and revenues in acute care. The company is also facing rising labor costs and staff shortages. We believe these challenges are temporary and we are encouraged by management’s plan to recruit and retain staff while reducing costs and renegotiating contracts with managed-care payers.”
8. Viatris Inc. (NASDAQ:VTRS)
TTM PE Ratio as of October 26: 5.86
Number of Hedge Fund Holders: 42
Viatris Inc. (NASDAQ:VTRS) is a Pennsylvania-based pharmaceutical and healthcare company. It is the 19th largest biotech company in the United States.
Viatris Inc. (NASDAQ:VTRS) is one of the most undervalued healthcare stocks to buy according to hedge funds. Apart from its valuation, its dividend yield is also quite attractive. As of October 26, Viatris Inc. (NASDAQ:VTRS) has a dividend yield of 5.34% and a payout ratio of 16.74%.
In Q2, 42 hedge funds owned Viatris Inc. (NASDAQ:VTRS)’s stock.
Miller Value Partners Income Strategy made the following comment about Viatris Inc. (NASDAQ:VTRS) in its Q1 2023 investor letter:
“Viatris Inc. (NASDAQ:VTRS) dropped in the quarter after it reported 4Q22 net sales of $3.87B, -10.7% Y/Y (-2% excluding foreign exchange impact), below consensus of $3.96B, and EPS of $0.83, compared to a 4Q21 net loss per share of -$0.22, ahead of consensus of $0.72. The company generated FY22 FCF of $2.55B, or a FCF yield of 22.1% and paid down $3.3B of debt in 2022, bringing total debt reduction to $5.4B since 2021. Management maintained its annual dividend at $0.48/share for FY23, or a ~5.0% yield, and repurchased ~$250MM worth of shares in January and February of 2023, or ~2.2% of the company’s market cap. For FY23, management is guiding for revenues of $15.8B (-2.9% Y/Y), Adjusted EBITDA of $5.2B (33.0% margin), and FCF of $2.5B, at the respective midpoints. The company also announced that Scott Smith, a board member of Viatris since December 2022, has been appointed as the company’s new CEO effective 4/1/23. Smith has previously served as the president and chief operating officer at Celgene Corporation, and most recently held the position of President at BioAlta, a publicly traded biotechnology company focused on the development of Conditionally Active Biologics antibody therapeutics.”
7. HCA Healthcare, Inc. (NYSE:HCA)
TTM PE Ratio as of October 26: 11.12
Number of Hedge Fund Holders: 66
HCA Healthcare, Inc. (NYSE:HCA) is one of the largest operators of for-profit healthcare facilities in the United States. It owns nearly 190 hospitals and over 2000 sites of care.
In its third quarter, HCA Healthcare, Inc. (NYSE:HCA) exceeded its revenue estimates by $390 million after generating $16.21 billion. However, the company missed the EPS estimates by 6 cents and posted a non-GAAP EPS of $3.91. According to its revised FY 23 guidance, HCA Healthcare, Inc. (NYSE:HCA) expects revenues between $63.5 billion to $64.5 billion and diluted EPS of $17.80 to $18.50 per share. The company also provided adjusted EBITDA guidance between the range of $12.3 billion and $12.6 billion.
On its earnings day, HCA Healthcare, Inc. (NYSE:HCA) declared a quarterly dividend of $0.60 per share, payable by December 28 to the shareholders of record on December 14.
Diamond Hill Capital made the following comment about HCA Healthcare, Inc. (NYSE:HCA) in its Q2 2023 investor letter:
“Also among our leading contributors were software and IT services provider Microsoft and health care facilities operator HCA Healthcare, Inc. (NYSE:HCA). In addition to HCA reporting a strong first quarter, managed care companies have reported continued strong utilization, which further supported the stock’s performance.”
6. Humana Inc. (NYSE:HUM)
TTM PE Ratio as of October 26: 19.1
Number of Hedge Fund Holders: 70
Humana Inc. (NYSE:HUM) is a health insurance company headquartered in Kentucky. Along with being one of the most undervalued healthcare stocks according to hedge funds, it is also one of the most undervalued large-cap stocks according to Wall Street analysts.
Humana Inc. (NYSE:HUM) was owned by 70 hedge funds in the second quarter of 2023, up from 68 in the previous quarter. Rajiv Jain’s GQG Partners increased its stake in the company by 33% in Q2 to over 2.96 million shares worth nearly $1.33 billion and was the most prominent stakeholder in the company.
On October 11, AM Best upgraded the Financial Strength Rating from A- to A for the health and dental insurance subsidiaries of Humana Inc. (NYSE:HUM). The agency also upgraded its Long-Term Issuer Credit Ratings to A from A- for the company on the same day.
Humana Inc. (NYSE:HUM) is one of the notable undervalued healthcare stocks in addition to Johnson & Johnson (NYSE:JNJ), Elevance Health, Inc. (NYSE:ELV), and The Cigna Group (NYSE:CI).
Vltava Fund made the following comment about Humana Inc. (NYSE:HUM) in its Q3 2023 investor letter:
“A new position in the portfolio is the US health insurer Elevance Health. This sector is quite familiar to us. In fact, we also have shares of another health insurer, Humana Inc. (NYSE:HUM), in our portfolio, which we first bought in 2009. The sector has been very attractive over the long term and its structure favours big players, which both Humana and Elevance Health are. Because each of these two companies also has some specific risk, we decided to increase our investment in the sector by acquiring this second position. Both companies are high-growth in terms of profitability and we expect their above-average growth to continue for quite some time.”
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Disclosure. None. 14 Most Undervalued Healthcare Stocks To Buy According To Hedge Funds is originally published on Insider Monkey.