Over the past 12 months, overall stock performance outperformed the Morningstar US Healthcare Index by more than 13%. The more defensive nature of the sector likely led to underperformance earlier this year, but recession fears reignited in the third quarter, resulting in an outperformance of around 1%.
As a result, the sector as a whole is valued relatively fairly, with average stock prices trading at approximately a 4% premium (on a market-cap weighted basis) to our fair value estimates. Medical distribution appears to be the most overvalued industry, while pharmaceutical companies and biotechnology appear to be the most undervalued.
Regardless of macroeconomic factors, we expect healthcare stocks to perform better if the market appreciates their stable dynamics. In the biopharmaceutical industry, the market has undervalued innovation beyond obesity leaders Eli Lilly LLY and Novo Nordisk NVO. In the managed care space, we believe near-term headwinds such as potential pharmacy benefit reform, Medicaid redetermination, and Medicare Advantage pricing are creating undervalued opportunities. Device and diagnostics valuations, which fell during the peak of the COVID-19 pandemic due to excessive optimism, are stabilizing.
Although the U.S. will likely face some volatility during the 2024 election cycle, we do not expect major changes in most healthcare industries. Although managed care faces regulatory risks that may arise during election cycles, we believe the risks are manageable this election cycle. BioPharma is still working on Medicare reform as part of the Anti-Inflation Act, and believes further significant price reform is unlikely.
Although the market is focused on fast-growing, more market-sensitive sectors, healthcare tends to hold up well amid macro pressures. During the Great Recession of 2009, the pharmaceutical and biotechnology industries performed steadily with limited impact on sales and profits due to relatively inelastic demand for healthcare. In biopharmaceuticals, Novo and Lilly's valuations are soaring in a market with a potential $200 billion GLP-1 market by 2031, but there is room for competitors to enter. You can
Hot stocks in the healthcare field
baxter international
Baxter BAX looks attractive, with the stock trading at a deep discount to what we think it's worth. Demand is improving across most medical supplies businesses due to increased medical usage, and the introduction of new products like the Novum IQ pump platform could further boost sales growth. Baxter also said most inflation issues in its supply chain have eased and a major new group purchasing organization agreement is scheduled to go into effect in 2025, which should help drive up Baxter's product prices and improve margins. It also represents the story of Although the recently announced sale of our Kidney Care division was realized at a disappointingly low price, management's renewed focus on growth and margins for the remaining business ultimately supported the Company's estimated fair value. We expect the stock price to rise.
humana
Humana HUM reflects a significant discount to our fair value estimate and holds a strong competitive position in Medicare Advantage, which has strong medium- to long-term prospects due to demographics, growing program popularity and future rate increases. I am. Humana expects its 2024 earnings to be lower due to mispricing of its Medicare Advantage plans, which may not fully cover surging healthcare utilization. However, over the next few years, Humana expects to increase prices and/or reduce benefits somewhat to encourage customers and end users to increase healthcare usage. So while there is some near-term uncertainty about the company's typically positive outlook, we believe Humana's long-term outlook remains positive.
moderna
Moderna's MRNA stock has been on a roller coaster ride in 2021. Investors may have initially been overly enthusiastic about the company's technology potential, but have since become too bearish on its post-coronavirus growth. There is some hope for sales of the company's coronavirus vaccine following massive demand from the pandemic in 2021 and 2022, but Moderna's pipeline of mRNA-based vaccines and treatments is expected to include multiple treatments. We believe we are making rapid progress in this field. Despite competition in the RSV vaccine market clouding the near-term outlook, we remain confident in the long-term sales trajectory of the company's diversified pipeline.
