The overall stock market rose with Donald Trump's victory in the US presidential election. But health care stocks are a different story.
The Morningstar US Healthcare Index has fallen 3.4% since Nov. 5, led by losses in AbbVie ABBV and Eli Lilly's LLY. Most of the decline occurred between Nov. 8 and Nov. 19, when the index fell more than 5%. Healthcare stocks recouped some of those losses on Wednesday. Additionally, some industries, such as medical device manufacturers and insurance companies, escaped the carnage.
The decline widened losses for healthcare stocks since late August. After a strong first eight months of the year, the sector has fallen nearly 10% since early September. During the same period, the Morningstar U.S. Market Index rose 5.5%. Analysts said losses were driven by increased uncertainty over various policies that could affect health care companies under the new administration.
On the plus side, this decline means that many healthcare stocks are trading at prices that analysts believe are undervalued. A list of names trading at deep discounts can be found at the end of this article.
The 'unpredictable' course of policy that will hit healthcare stocks
“Government leadership in health care in general is becoming increasingly unpredictable,” said Karen Andersen, director of health care equity research at Morningstar. That's certainly making investors nervous. But internally, some health care companies are doing better than others. The end result of the uncertainty is that many stocks have fallen, but there are a mix of headwinds and tailwinds.
On the other hand, Mr. Andersen explains that a full-scale deregulation push under the new Trump administration could make it easier for large companies to pursue mergers and acquisitions. Repealing the Medicare bargaining portion of the Inflation Control Act could ease pricing pressures within the industry. Corporate tax cuts are seen as more likely to happen thanks to Republican control of the White House and Congress, and could benefit big businesses overall.
But the outlook became uncertain after President Trump chose Robert F. Kennedy Jr. to head the Department of Health and Human Services. Andersen noted that President Kennedy has been vocal in his opposition to vaccines, which could make it difficult for companies to approve new vaccines and undermine public confidence in vaccines overall. President Kennedy also expressed skepticism about the effectiveness of obesity drugs, which have been a big boost for the pharmaceutical industry over the past year.
Pharmaceutical companies suffer losses
The biggest drag on U.S. health care indexes since the election has been pharmaceutical companies AbbVie and Lilly. AbbVie is down an eye-popping 17% since the election, and Lilly is down 6.3%. Together, these stocks account for about 1.7 percentage points, or about 50%, of the healthcare index's 3.4% decline since Nov. 5, according to data from Morningstar Direct.
Vaccine maker Pfizer PFE has also suffered significant losses, with its stock price down more than 9% since the election. It doesn't carry as much weight in the index as AbbVie or Lilly. Pharmaceutical company Amgen AMGN and life sciences supplier Thermo Fisher Scientific TMO also suffered losses, making them among the biggest critics of the index's overall performance.
Insurers and device manufacturers avoid carnage
However, not all of these stocks are struggling. Pharmaceutical wholesaler McKesson MCK rose 18% following the election, while UnitedHealth Group UNH rose 5.9%.
Analysts say insurers could receive a boost from the incoming administration. “A Republican victory could relieve some of the pressure on some parts of the managed care industry,” said Julie Utterback, senior equity analyst at Morningstar. “Specifically, we expect regulators to stop turning the screws so harshly on Medicare Advantage beyond current risk adjustment efforts, which are expected to be completed in 2026. This bodes well for M&A-focused insurance companies like .
Meanwhile, medical device makers Intuitive Surgical ISRG, Boston Scientific BSX and Stryker SYK have all returned more than 4% since the election.
Opportunities in undervalued stocks
The sector is trading at an overall discount of 6.6%, according to Morningstar's fair value estimates. Investors can still find opportunities, especially with the overall US market trading at a premium of around 5%.
Dan Kemp, Morningstar's chief research and investment officer, said last week that “healthcare companies are trading at prices well below Morningstar's fair value expectations, with a lot of bad news baked into prices and a positive surprise.” The possibility of this happening is increasing.”
Of the 109 healthcare stocks covered by Morningstar analysts, 15 have a five-star rating. This means that these stocks are trading at a significant discount to our fair market value estimates. The other 45 stocks have 4-star ratings and are considered undervalued, albeit at lower discounts than 5-star stocks.
“The uncertainty over the next four years under the Trump administration has created some buying opportunities,” Andersen said, adding that the sector's decline has led to overvalued stocks like Lilly and Novo Nordisk NVO. It added that some of the stocks in the market have come close to their fair value estimates. She noted that Lilly's weight in the U.S. Healthcare Index skews the overall index toward the higher side. Our analysts believe Lilly is overvalued by 30%. Without this stock, the U.S. Healthcare Index would be trading at a discount of nearly 9%.
