Morningstar’s List of Best-to-Own Healthcare Stocks

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With the S&P 500 having dropped 20% so far this year, it could be a good time to scoop up some bargains in the stock market.

Morningstar has put together a list of the “best stocks to own” in various industries, and the healthcare sector is usually solid.

“Healthcare is a sector that generally holds steady no matter what is happening in the economy,” the research firm says. That’s important, given expectations that the economy will slow and perhaps fall into recession next year.

So how does Morningstar define “best stocks”?

Expensive Healthcare Lead

Wide Moats

It’s companies with wide moats, which means a strong and sustainable edge over their competitors. “We’re confident that they will produce returns that outweigh their costs for the next 20 years or more,” Morningstar says.

“The strength of their competitive advantages is also either steady or increasing, which adds to our confidence in their long-term growth.”

Environmental/social/governance (ESG) factors also play a role. “The best companies have business models that allow them to effectively navigate evolving ESG issues that could materially impact their business,” Morningstar said.

Other metrics are involved, too. “The companies that make our list have predictable cash flows, so our analysts can more accurately estimate how much the businesses are worth,” Morningstar said. “These companies also make smart decisions about how they manage and invest their money.”

Morningstar doesn’t recommend that you buy all these stocks now. About half the ones that made its overall list recently traded above the firm’s fair value estimates.

Just eight of the 19 healthcare stocks cited by Morningstar recently traded beneath their fair value. Here they are.

  1. Roche Holding  (RHHBY) , the Swiss drug company.
  2. Thermo Fisher Scientific  (TMO) – Get Free Report, the scientific equipment company.
  3. Sanofi  (SNY) – Get Free Report, a France-based pharmaceutical company.
  4. Medtronic  (MDT) – Get Free Report, the medical device company.
  5. Zoetis  (ZTS) – Get Free Report, which sells health products for animals.
  6. GSK  (GSK) – Get Free Report, the British drug company.
  7. Zimmer Biomet  (ZBH) – Get Free Report, a medical equipment maker.
  8. West Pharmaceutical Services  (WST) – Get Free Report, which makes supplies for the drug industry.

Roche: Morningstar analyst Karen Andersen puts fair value for the stock at $57, and it recently traded at $39.39.

Despite the disappointing test results for Roche’s Alzheimer’s drug gantenerumab, “we remain bullish on Roche’s established portfolio and strong pipeline in oncology,” she wrote in a commentary.

Roche also has “continued solid growth prospects for other key drugs in immunology and hematology.” In addition, Roche is the market leader in biotechnology and diagnostics, Andersen said.

Thermo Fisher: Morningstar analyst Alex Morozov puts fair value for the stock at $590. It recently traded at $540.68.

“Against the backdrop of declining coronavirus revenue, wide-moat Thermo Fisher Scientific’s third-quarter was strong,” he wrote in a commentary.

“The firm’s core operations, buoyed by biopharma demand, grew 14% in the quarter, implying ongoing market share gains for the company.”

Further, Thermo “stated that it is nearly entirely offsetting inflation through price increases, which is impressive and supportive of the company’s dominant vendor position,” Morozov said.

The author of this story owns shares of Medtronic. 

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