Finding value in this market is difficult because the S&P 500 has increased over 50% since its bottom in October 2022. Certainly, you won’t find it in technology or mega caps, which have soared due to the AI craze. However, healthcare stocks stand out, considering the Health Care Select Sector SPDR Fund (NYSEARCA:XLV) is up by only 21% over the same period.
A good reason to consider the healthcare sector as we head into a volatile season is due to its defensive qualities. Regardless of the economic environment, populations need healthcare services and pharmaceutical products. Moreover, the sector has a tailwind of an aging demographic that will power growth in the coming decades.
According to Finviz, the following healthcare stocks are within 10% of their 52-week lows. However, looking at their long-term opportunities in their end markets, these stocks can achieve consistent growth over the next decade. Furthermore, after their pullbacks, their valuations are undemanding and support a favorable risk-reward going forward.
Edwards Lifesciences (EW)
On July 25, shares of Edwards Lifesciences (NYSE:EW) plunged by 31% after reporting Q2 2024 earnings. Although guidance was disappointing, the selloff is overdone, leaving shares at levels that offer upside going forward.
The main reason for the selloff was management’s lowered forecast on transcatheter aortic valve replacements (TAVR) sales. They reduced the full-year growth guidance from a previous range of 8 to 10% to 5 to 7%. In the earnings call, management cited the expansion of structural heart therapies, such as recently approved tricuspid therapies, as the source of the weakness.
But beyond these short-term headwinds, CEO Bernard Zovighian remained optimistic about TAVR sales. He noted there is a huge untapped market due to the undertreatment of aortic stenosis. Moreover, he disclosed that the company had accelerated efforts to improve treatment rates for patients suffering from this valvular disorder.
At these 52-week lows, EW stock is one of the healthcare stocks to buy, given its strong competitive position in heart valves. Moreover, management expects its transcatheter mitral and tricuspid devices to drive the next phase of growth. Even analysts who downgraded the stock on earnings expect upside in the stock. For instance, JPMorgan’s Robbie Marcus reduced the price target to $72, whereas Truist cut the target to $82, implying at least a 20% upside.
Walgreens Boots Alliance (WBA)
This retail pharmacy chain has been one of the worst performers, down by 56% year-to-date. Recently, things got worse for Walgreens Boots Alliance (NASDAQ:WBA) and it was pushed out of the Nasdaq 100. Indeed, this drug retail chain has faced a cascade of negative headlines. However, with the stock in oversold territory and management with a turnaround plan in place, a rebound is in the offing.
Enter the bull case. It starts with the appointment of industry veteran Mr. Wentworth as CEO in October 2023. Mr. Wentworth had impressive success at Express Scripts and Evernorth, Cigna’s (NYSE:CI) health services organization, where he was the founding CEO. Notably, this experience will be instrumental in the turnaround plan.
Mr. Wentworth got the ball rolling, bringing in five new executives, including a new finance chief and healthcare unit head. Secondly, he initiated a strategic review that revealed that only 75% of U.S. stores contribute 100% of segment adjusted operating income. Based on these findings, management has initiated a store footprint optimization program that aims to close a majority of underperforming stores.
Besides the store closures, management is reevaluating assortment and accelerating digital and omnichannel offerings. Furthermore, it’s in discussion with pharmacy benefit managers and payer partners to align incentives. At 4 times 2024’s EPS guidance of $2.80 to $2.95, WBA stock is one of the cheapest healthcare stocks. The bargain valuation provides a margin of safety as you wait for the turnaround.
Zimmer Biomet (ZBH)
As elective procedures have accelerated from their COVID-slump, medical device makers have soared. However, Zimmer Biomet (NYSE:ZBH) has faced some execution challenges that have hampered the stock. While competitor Stryker (NYSE:SYK) is up 9% YTD, ZBH stock is down 9%. This underperformance presents an opportunity for a catchup rally going forward.
The tailwinds for Zimmer Biomet are still intact. As the dominant player in large joint reconstruction with a 24.6% market share, according to Orthoworld, it’s in a strong competitive position. First, the aging baby boomer population will drive demand for joint replacement procedures in the long term. Secondly, the medical device maker has new products targeted at younger generations.
In terms of its business quality, its moat is cemented by its deep relationships with orthopedic surgeons. Practitioners who choose its shoulder, hip and knee replacement products face high switching costs, keeping them tied to Zimmer’s products. Therefore, as long as it can keep pace with innovation from rivals, it can maintain solid growth.
Considering its valuations, Zimmer is one of the bargain healthcare stocks. As of this writing it trades at 14x forward non-GAAP EPS compared to a 5-year average of 19x. With management projecting 4.5% – 5.5% revenue growth in 2024, this stock has upside.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article 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.