The Best Healthcare Stocks to Buy

So far in 2024, healthcare stocks continue to limp behind the broader market: The Morningstar US Healthcare Index has returned about 3.68% this year, versus 8.68% for the broad-based Morningstar US Market Index as of May 8.

Why the underperformance? “There was a rotation out of healthcare in 2023 as the market moved away from thinking a recession was coming, and with this, there was a move away from defensive stocks (like healthcare stocks) and toward more growth-oriented stocks,” explains Morningstar director Damien Conover.

Despite this shortfall, Conover sees stable fundamentals and favorable secular trends in the healthcare sector. “Healthcare holds some industries (like pharma/biotech) that spend some of the highest levels of research and development, which tends to generate major improvements in innovative treatment options.”

Is Healthcare a Good Sector to Invest in Now?

Morningstar thinks healthcare valuations look attractive today across almost all industries. Most larger healthcare firms maintain economic moats; demand for health-related products and services continues to rise as populations age; and healthcare companies tend to have high research and development spending, which can generate major improvements in treatment options.

The 10 Best Undervalued Healthcare Stocks to Buy Now

The healthcare stocks below all earn Morningstar Economic Moat Ratings of narrow or wide, and they are trading below our fair value estimates as of May 8, 2024.

1. Bayer BAYRY
2. Illumina ILMN
3. Baxter International BAX
4. Royalty Pharma RPRX
5. Roche Holding RHHBY
6. Grifols GRFS
7. CVS Health CVS
8. Incyte INCY
9. Fresenius Medical Care FMS
10. AMN Healthcare Services AMN

Bayer

• Morningstar Price/Fair Value: 0.42
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 0.38%
• Industry: Drug Manufacturers—General

German healthcare and agriculture conglomerate Bayer tops our list of the best healthcare stocks to buy now. Despite the heavy debt added by the Monsanto acquisition, we believe Bayer holds a sound balance sheet with low levels of risk. Shares are trading at a 58% discount relative to our $18.50 fair value estimate.

Largely on the basis of the strong competitive advantages of the healthcare group and to a lesser extent the crop science business, we believe Bayer has created a narrow economic moat. Bayer is evaluating the divestitures of the crop science and consumer healthcare businesses, which appear to hold few synergies with the prescription drug business.

In the healthcare division, Bayer’s strong lineup of recently launched drugs and solid exposure to biologics should support steady long-term cash flows. Bayer’s hemophilia franchise and key ophthalmology drug Eylea are biologics. While competition is increasing in hemophilia and in eyecare, the manufacturing complexity of these drugs helps to deter generic pressure. Also, new formulations of Eylea and hemophilia drugs hold potential to keep competition at bay. Further, strong demand for cardiovascular drug Xarelto should continue to drive growth, but the drug’s key 2026 patent loss will likely create growth headwinds.

Bayer’s healthcare segment also includes a consumer healthcare business with leading brands Aspirin and Aleve. Brand recognition is key in this unit, as evidenced by the company’s iconic Aspirin, which continues to post strong sales even after decades of generic competition.

In addition to healthcare, Bayer runs a leading crop science segment, which includes crop protection products (pesticides, herbicides, fungicides) and the fast-growing plant and seed biotechnology business. Similar to the drug business, this segment is research and development intensive, and Bayer has developed a strong portfolio of products. The downside to this business is that demand is heavily dictated by weather and commodity prices, which will determine how much farmers can afford to spend on crop treatment. The acquisition of Monsanto has significantly expanded Bayer’s competitive position in this industry. On the negative side, the acquisition increased Bayer’s exposure to litigation around potential side effects from glyphosate use. While many studies have shown glyphosate use to be safe, some reports of linkage to cancer drove large class-action legal cases against Bayer and led to a legal settlement of over $15 billion.

Illumina

• Morningstar Price/Fair Value: 0.49
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Diagnostics & Research

Next on our list of the best healthcare stocks to buy now is Illumina, which provides tools and services to analyze genetic material. We think the firm’s differentiated technology, ongoing innovation, and large installed system base create significant entry barriers for its competitors. Shares of this stock look 51% undervalued compared with our $228.00 fair value estimate.

Illumina aims to transform human health practices through its leadership of genomic sequencing and related applications. The firm provides a broad range of instruments and related consumables to help researchers and clinicians identify and understand genetic variations. The scale of these projects can be wide, such as population genomic initiatives being pursued in many countries, or narrow, such as noninvasive prenatal screening. We believe Illumina will continue to benefit from the rapidly expanding applications of genomic sequencing tools through its own innovation and select acquisitions.

During the past decade or so, technological advancements in the sequencing industry have largely been led by Illumina and brought down the cost of assembling one genome from nearly $3 billion in the 13-year Human Genome Project completed in 2003 to $1,000 after Illumina introduced HiSeq X in early 2014. Further innovation, like the NovaSeq, continued to push down these costs, and Illumina expects its new NovaSeq X Series to enable the $100 genome, which could greatly increase the accessibility of genomic sequencing. At a lower cost, genomic sequencing could even have wide appeal in clinical applications beyond current strongholds in oncology and reproductive health.

Threats from disruptive technologies may never fully disappear, though. For example, cheaper sequencing tools may eventually displace Illumina’s stronghold in genomic sequencing. Currently, we remain unconvinced that emerging systems will fully dethrone Illumina’s sequencing technologies, though, given the switching costs associated with its large installed system base and its own new commercialization efforts. Also, uncertainties around the Grail liquid biopsy technology surrounds eventual demand, and those uncertainties may prevent outright acquirers or capital market participants from fully recognizing Grail’s value if Illumina divests Grail as planned in late 2024.

Baxter International

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 3.21%
• Industry: Medical Instruments & Supplies

Our analyst sees possibilities ahead for Baxter International as it shakes off external pressures and renews existing contracts. Given improving top-line prospects and easing input cost pressures, we suspect margins can expand from recent lows. This affordable healthcare stock trades at a 46% discount to our fair value estimate of $67.00.

Although the 2015 Baxalta spinoff was successful, Baxter’s financial results fell substantially in 2022-23 on external pressures, such as inflation and weak medical utilization trends. We see these external pressures easing. Also, we suspect Baxter’s financial prospects will improve, especially in 2025 and beyond, as hospitals renegotiate their reimbursement deals with third-party payers, and as Baxter renegotiates significant contracts, a key group purchasing organization among them.

From a business strategy perspective, Baxter is currently focused on spinning off its kidney care division and improving the profit growth of its other businesses. In kidney care, Baxter’s renal and acute care technology supports patients with failing kidneys. Baxter generates most of its kidney care revenue from at-home patients using its peritoneal dialysis tools, but it also sells hemodialysis products to dialysis clinics and continuous renal replacement therapy and other organ support equipment to intensive care units. Concerns about long-term demand for dialysis, given the halting of a related obesity drug trial, have created uncertainty around the kidney care segment’s expected spinoff by mid-2024. However, we suspect the intermediate-term outlook for dialysis demand has not changed much given the potential benefits of those drugs on surviving renal patients.

The balance of Baxter’s business is focused on providing basic medical supplies and equipment to caregivers such as hospitals, which have been under pressure in recent years due to a mismatch in labor cost hikes and reimbursement rates with third-party payers that are in the process of being renegotiated. Through the 2021 Hillrom acquisition, Baxter provides beds, patient-monitoring devices, and other digital tools. These Hillrom tools, along with Baxter’s own infusion pumps, have been negatively affected by inflationary pressures on input costs that have severely depressed margins, which remain a key area for Baxter to improve. Baxter also sells many injectable therapies, such as IV solutions, generic pharmaceuticals, and surgical tools to control bleeding.

Royalty Pharma

• Morningstar Price/Fair Value: 0.54
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 2.97%
• Industry: Biotechnology

Royalty Pharma is the first biotechnology firm on our list of the best healthcare stocks to buy now. It earns a narrow moat rating thanks to its high-quality investment portfolio that consists of royalties on approved biopharma products across different therapeutic areas. This affordable healthcare stock trades at a 46% discount to our fair value estimate of $52.00.

Royalty Pharma is the largest buyer of biopharmaceutical royalties and a leading funder of innovation across the biopharmaceutical industry. The company makes lump-sum payments in exchange for future cash flows linked to those products’ sales revenue, which differentiates it from other biotech companies that are exposed to high R&D and/or manufacturing costs. Its uniqueness also lies in the diversity of royalties across different therapeutic areas. This stands in contrast to a typical biotech firm’s focus on developing specialized therapies targeting certain diseases.

Royalties play an important role in the commercialization process of cutting-edge therapies. Royalties are usually created as a form of payment when a large biopharma company takes over research insights from smaller biotech firms or research institutions for further marketing and development through licensing agreements. In this process, royalty recipients often face the issue where multiple small future royalty streams cannot fulfill ongoing large lump-sum R&D funding needs. The mismatch is where Royalty Pharma captures its market opportunity.

The increasing demand for capital across the global biopharma industry has been propelling Royalty Pharma’s growth in recent years. The total dollar value of all royalty transactions in 2022 was 10 times the volume in 2015. Royalty financing shows its advantage as a nondilutive funding method that satisfies instant funding needs despite the conditions of debt and equity markets. As a leading royalty acquirer, we think Royalty Pharma is in a great position to capture market tailwinds.

With the average development cost for a newly approved drug surpassing $1.4 billion in 2022, we find Royalty Pharma’s capability of executing large deals appealing. Royalty Pharma has a dominant market position for transactions sized over $500 million. The company’s extensive experience in structuring flexible deals with installment and milestone payments makes it a preferred choice for many royalty sellers.

Roche Holding

• Morningstar Price/Fair Value: 0.55
• Morningstar Uncertainty Rating: Low
• Morningstar Economic Moat Rating: Wide
• Forward Dividend Yield: 4.43%
• Industry: Drug Manufacturers—General

Swiss biopharmaceutical firm Roche Holding is the only company on our list of the best healthcare stocks that earns a wide moat rating, thanks to its status as the leader in oncology therapeutics and in vitro diagnostics. Roche stock is priced at a 45% discount to our fair value estimate of $55.00.

We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic expertise.

Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition. In addition, with the launch of Perjeta in 2012, Kadcyla in 2013, and Phesgo (a subcutaneous coformulation of Herceptin and Perjeta) in 2020, Roche has somewhat refreshed its breast cancer franchise. Gazyva, approved in CLL and NHL and in testing in lupus, as well as new bispecific antibodies Columvi and Lunsumio, will also extend the longevity of the Rituxan blood cancer franchise. Roche’s immuno-oncology drug Tecentriq launched in 2016, and we see peak sales potential above $5 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales).

Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

Grifols

• Morningstar Price/Fair Value: 0.58
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Drug Manufacturers—General

Grifols has a strong position in the global plasma protein oligopoly, and it earns a narrow moat rating based on the market’s high barriers to entry, rooted in cost advantages and intangible assets. This cheap healthcare stock trades 42% below our fair value estimate of $8.40.

Market share in the global plasma-derived protein business is concentrated among a small number of global players. Grifols lifted itself to the level of competitors Takeda and CSL with the $3.7 billion acquisition of Talecris in 2011. Over the past several years, the firm has been fighting competition and coronavirus pandemic headwinds with acquisitions and investments to build plasma collection and fractionation capacity, support its portfolio and pipeline, and expand geographically.

Today, Grifols holds more than 20% of a roughly EUR 15 billion immunoglobulin market that is growing at a double-digit rate thanks to demand across multiple types of immune disorders. While IG accounts for more than 40% of Grifols’ top line, pulmonary product Prolastin leads the market for alpha-1 antitrypsin deficiency, and Grifols has seen solid albumin growth, owing to Chinese demand. With several products under the same roof, Grifols is able to improve margins, as more of the proteins in plasma are turned into marketed products.

Recombinant and novel hemophilia products have shrunk the plasma-derived factor market, and Grifols is facing new competition in the immunoglobulin market from novel FcRn targeted therapies, as well as recombinants and gene editing therapies that could compete with Prolastin. However, we continue to see immunoglobulin market demand as solid in the near-term to midterm, due to several large indications that are less vulnerable to competition, and gene editing is likely to take years to reach the market. In the meantime, Grifols continues to expand its pipeline, driven by the recent Alkahest, GigaGen, and Biotest acquisitions.

The $1.7 billion acquisition of Novartis’ blood and plasma diagnostics business in 2014, followed by the $1.85 billion acquisition of partner Hologic’s share of this business in 2017, complements Grifols’ plasma business, locking in a dominant market share in blood and plasma testing in the US. The diagnostics arm represents 10% of total revenue and offers a steady business that diversifies Grifols’ operations in the long term.

CVS Health

• Morningstar Price/Fair Value: 0.60
• Morningstar Uncertainty Rating: Medium
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 4.77%
• Industry: Healthcare Plans

CVS is the only company from the healthcare plans industry on our list of the best healthcare stocks to buy now. As a top-tier medical insurer, pharmacy benefit manager, and pharmacy retailer, we believe CVS possesses enough scale-related cost advantages to generate economic profits for the long run. CVS currently looks 40% undervalued relative to our $93.00 fair value estimate.

CVS aims to be the most customer-centric health company in the US and has spent over a decade positioning itself as a managed care leader, with the acquisitions of pharmacy benefit manager Caremark (2007), insurance provider Aetna (2018), and healthcare service provider Oak Street (2023) defining its strategic direction. CVS’ top-tier retail pharmacy, health insurer, and PBM franchises create the potential to improve health outcomes and even bend the healthcare cost curve for its clients, especially if it can align incentives by owning healthcare service providers as well.

CVS appears uniquely positioned to improve health outcomes, and we appreciate management’s focus on better leveraging its assets through digital and other means to bring a more consumer-centric approach to healthcare, which could provide many benefits. For example, a recent observational study showed when members use both CVS medical and pharmacy benefits, their medical costs decline 3%-6% over a three-year period through factors like fewer hospitalizations and emergency room visits. Driving savings like that would be attractive to many potential clients, like self-funded employers, and CVS’ own at-risk operations, like its Medicare Advantage plans, by reducing medical costs. Also, CVS continues to dive further into healthcare services, especially through recent acquisitions of primary-care assets. We think the relatively high-margin healthcare services business could eventually accelerate CVS’ profit growth directly or by reducing long-term costs in its medical and pharmacy benefit businesses.

With its integrated strategy, management aims to accelerate bottom-line growth to the mid- to high-single digits in the long run, which we think is achievable.

Incyte

• Morningstar Price/Fair Value: 0.62
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Biotechnology

The second biotechnology company among our best healthcare stocks to buy now, Incyte has been rapidly expanding its approved portfolio of drugs beyond its core Jakafi franchise for myelofibrosis. Incyte is 38% undervalued relative to our $88.00 fair value estimate.

Incyte has built a solid foundation over the past decade with hematology drug Jakafi, and the approval of the same active ingredient as oral dermatology drug Opzelura is expanding the firm’s focus to new therapeutic areas. We think the strategy to find more effective combination therapies in hematology and build a larger oncology and dermatology portfolio is solid, although we’re waiting for key data before assuming the firm can grow through Jakafi’s patent expiration in 2028.

Jakafi initially gained traction in 2011 as the only drug approved for severe myelofibrosis, a rare blood disorder. Jakafi’s stronghold of the MF market is likely to continue, although new drugs are entering the market for subsets of the population. Incyte expanded Jakafi’s label to polycythemia vera (2014), steroid refractory acute graft versus host disease (2019), and chronic GvHD (2021) should together push peak US sales to $3 billion. Incyte’s ALK2 and BET-targeted drugs are being combined with Jakafi in myelofibrosis, which could lead to a fixed-dose combination regimen that refreshes this franchise beyond Jakafi’s patent expiration.

In dermatology, we see strong potential for a topical version of the active ingredient in Jakafi (ruxolitinib), which was approved in 2021 in atopic dermatitis as Opzelura and received a label expansion in vitiligo in 2022. While the atopic dermatitis market is crowded, Opzelura’s launch is going strongly, and with no other approved vitiligo drugs, unmet need in this indication is high.

In oncology, the approval of lymphoma drug Monjuvi (part of a collaboration with MorphoSys) in 2020 in the US and 2021 in Europe also expands Incyte’s hematology portfolio, and studies are in progress testing the drug in earlier-stage patients. Incyte received approval for its PD-1 antibody Zynyz in the niche indication of Merkel cell carcinoma but continues to move forward in broader indications, and several oral PD-L1 programs could also move forward with additional data.

Fresenius Medical Care

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: 3.15%
• Industry: Medical Care Facilities

Fresenius Medical Care is 37% undervalued relative to our $32.00 fair value estimate. As the largest dialysis company in the world, this cheap healthcare stock earns a narrow moat rating based on its intangible assets and scale-related cost advantages primarily from its services business.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from decent demand in developed markets, such as the US, and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low- to mid-single digits in the long run, we expect top-line growth for Fresenius to grow at a similar pace during the next five years, if it can get past current inflationary and other challenges.

The company’s position as the top dialysis service provider and equipment maker in the world remains symbiotic and unique. Fresenius’ experience operating over 4,100 dialysis clinics around the globe (about 1,000 more than the next-largest player, DaVita) gives it insights into caregiver and patient needs to inform service offerings and product innovation. Fresenius uses clinical observations to develop and then manufacture even better technology to treat ESRD patients. It outfits all its clinics with its own brand of equipment and consumables, which has margin implications related to system costs and operating efficiency for staff. However, other dialysis clinics appreciate Fresenius’ technology as well, and Fresenius claims about 35% market share in dialysis equipment/consumables while serving only 9% of ESRD patients through its global clinics. Especially telling, main rival DaVita remains one of Fresenius’ top product customers.

With growing clinical and payer support for at-home treatments, Fresenius is taking aim at those ESRD therapies with significant investments, too. It recently purchased NxStage Medical for home hemodialysis, which appears differentiated in the industry for its ease of use and physical size. The company also aims to improve on its peritoneal dialysis offering where Baxter has traditionally excelled.

AMN Healthcare Services

• Morningstar Price/Fair Value: 0.63
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Narrow
• Forward Dividend Yield: NA
• Industry: Medical Care Facilities

We end our list of the best healthcare stocks to buy now with AMN Healthcare Services, which trades 37% below our fair value estimate of $95.00. AMN is one of America’s largest healthcare staffing companies. The healthcare industry is one of the fastest growing in the US, and the demand for workers will likely remain robust as a result, providing AMN a strong operational foundation.

Healthcare utilization is expected to increase at a solid clip over the coming decades, and the pipeline of healthcare professionals is not expected to keep pace, especially in light of the coronavirus pandemic. This combination of factors should serve as a strong foundation for AMN Healthcare through our explicit forecast period. While the firm continues to navigate near-term demand declines as providers return to normalized nonpandemic utilization, we believe long-term demand will remain robust for the firm’s core service—providing temporary and permanent labor for healthcare providers—as projected utilization continues to outpace the net number of nurses the US produces.

AMN is one of the world’s largest providers of healthcare workers, with the core of its business in the travel nurse market niche. The firm has a large nationwide client base, which has attracted a quality supply of job seekers. We expect AMN’s sizable pool of workers should help the firm to drive top- and bottom-line growth over an economic cycle.

AMN’s ability to provide almost any type of medical worker is also highly attractive to its customers, as they can use one vendor for most of their placement needs. These managed services relationships have been a major focus for AMN Healthcare, and the firm has become one of the premier HR managed services providers as a result.

A managed services arrangement entails AMN Healthcare taking over the entire staffing and employee measurement process for a provider system. We believe this strategy will serve to reinforce its narrow economic moat. This service creates higher customer switching costs, allows AMN to gain first shot at meeting a customer’s entire staffing needs, and gives the firm the opportunity to see real-time leading metrics in the healthcare industry.

Having said that, AMN is exposed to fluctuations in the larger labor markets and any hiccups in the growth of healthcare workers. Healthcare staffing firms have historically been hard-hit after economic downturns, and we expect this to hold true in the future.

How to Find More of the Best Healthcare Stocks to Buy

Investors who’d like to extend their search for healthcare stocks to invest in can do the following:

• Review Morningstar’s comprehensive list of healthcare stocks to investigate further.
• Use the Morningstar Investor screener to build a shortlist of healthcare companies to research and watch.
• Read the latest news about notable healthcare companies from Morningstar’s Damien Conover and Karen Andersen.