Health-Care Stocks Have Outperformed; Here Are a Few Undervalued.

The S&P 500 Healthcare index gained 4.8% during the past 12 months, versus a 6% dip for the S&P 500 as a whole.

Health-care stocks have outperformed the market as a whole over the past year, as our demand for health products and services hasn't quit.

The S&P 500 Healthcare index rose 4.8% over the past 12 months, compared with a 6% decline for the S&P 500 as a whole.

Still, the average health-care stock covered by Morningstar was about 11% undervalued compared with the firm’s fair-value estimates as of Dec. 31.

The undervaluation is prevalent among most health-care segments, particularly medical devices, biotechnology, care providers and services industries.

Here are Morningstar’s top undervalued health-care stocks.

Illumina  (ILMN) - Get Free Report, which provides tools and services to analyze genetic material. Morningstar analyst Julie Utterback assigns the company a narrow moat (competitive advantage) and puts fair value for the stock at $269, 27% above recent trades at $211.

Illumina’s preliminary 2022 results included “slightly better-than-anticipated sales but a higher-than-expected tax rate for 2022 and 2023,” she wrote in a commentary.

“The company will likely disappoint investors again on the bottom line in the near term, despite an expected strong launch of the NovaSeq X Series [a gene-sequencing system].”

But “over the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling” genomes.

Moderna  (MRNA) - Get Free Report, a biotech company that provides a covid vaccine. Morningstar analyst Karen Andersen gives the company no moat and puts fair value for the stock at $266. That's 39% above recent trades at $191.

She affirmed that fair-value level Jan. 18 following “positive phase 3 data from the first interim analysis of the firm’s respiratory syncytial virus (RSV) vaccine, mRNA-1345,” she wrote in a commentary.

“We’ve raised our assumed probability of approval for the vaccine to 70% from 50%,” she said. But “we’ve also boosted our long-term assumptions for annual research and development expenses following the firm’s massive $4.5 billion guidance for 2023 R&D expenses at a recent healthcare conference.” That’s a big climb from the $3.3 billion spent last year.

Meanwhile, “the market underestimates the potential of Moderna’s mRNA technology,” Andersen said.

Zimmer Biomet  (ZBH) - Get Free Report, which provides medical devices and equipment. Morningstar analyst Debbie Wang assigns the company a wide moat and puts fair value for the stock at $175. It recently traded at $126, or 39% below fair value.

“Zimmer is the undisputed king of large joint reconstruction, by far,” she wrote in a commentary. “We expect favorable demographics, which include aging baby boomers and rising obesity, to fuel solid demand for large-joint replacement that should offset price declines.”

To be sure, “Zimmer stumbled into a series of pitfalls in 2016-2017, including integration issues, supply and inventory challenges, and quality concerns. New management's efforts to turn around the firm have been admirable, but the pandemic has put a damper on progress.”