The health care sector experienced uneven performance in 2021. Looking ahead, Portfolio Manager Andy Acker believes discounted valuations, innovation and the waning influence of COVID-19 are creating attractive investment opportunities throughout the sector.

Key Takeaways

• COVID-19 has led to swings in health care stock returns over the past two years. But that could change as the pandemic begins to retreat.
• In COVID’s wake, we think many stocks now trade at a discount to the value of their underlying companies’ growth prospects.
• In our view, opportunities can be found throughout the sector, including in biotech where new treatment modalities are revolutionizing care; in medical devices where advances in robotic surgery are improving patient outcomes; and in managed care, which is benefiting from expanded government health insurance programs and a robust job market.

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Andy Acker: COVID continued to influence the performance of health care stocks in 2021, as returns were quite uneven throughout the sector. As we go through the Omicron wave now, we believe that the impact of COVID-19 will begin to wane.

So far, what we’ve seen is the Omicron variant comes on quickly, but in many parts of the world, declines just as quickly. And also, its severity seems to be less than other variants that we’ve been through before. So, this starts to raise the question of what will the world look like in a post-pandemic era?

As we think about the outlook for health care, we see opportunities across all four of the key sub-sectors. In the biotech sector, the innovation remains extremely high, with all new modalities of treating human disease, from cancer to heart disease to diabetes. We have new modalities including precision-guided antibody drug conjugates. We have gene therapy; we have gene editing that can now be done in patients; and we have to remember that the majority of the new medicines that are developed today come from small- and mid-cap biotech stocks, which have seen the biggest losses recently, and we think have a  positive outlook going forward.

Within the pharmaceutical sector, we see continued innovation across these areas, as well, and valuations that, we think, trade at a substantial discount to the market, mostly because of unfounded fears about significant changes to drug pricing, which we think are less likely to become reality.

When we think about medical devices, there are advances that are getting patients out of the hospital faster. We’re using robotic surgery to go beyond the potential of the human hand to conduct surgeries more accurately and with better outcomes for patients.

And in the managed care sector, we think stocks will benefit and companies will benefit from the improving labor market and from the growth of government programs.

The COVID-19 wave that we’re currently in will hopefully be one of the last ones that we face, and hopefully the market will be able to get back to a more normal situation where true innovation beyond just for pandemics, including addressing high, unmet medical needs like cancer and heart disease and diabetes and new medical technology, will really come to the forefront in the minds of investors.

So, we continue to see opportunities across the health care landscape. We believe the valuations are significantly discounted relative to their history and relative to the market. And so, we continue to have a favorable outlook for the health care sector despite the current volatility that we are experiencing.