With the market rally broadening out, value sectors are beginning to catch a bid. Healthcare deserves consideration as one of the value sectors presenting some bargains in this overheating market.
As of this writing, the healthcare sector has increased by 7.0% year-to-date (YTD). Although that’s a decent return, it pales in comparison to the 15% gain for technology and the 20% gain in communication services. This underperformance presents a catchup opportunity for healthcare. Moreover, the sector is trading at 19 times the next twelve-month earnings compared to the S&P 500’s 20.6 times.
Fundamentally, the growth outlook for the entire sector is excellent. According to the Centers for Medicare & Medicaid Services (CMS), healthcare spending will grow 5.4% annually between 2022 and 2031. Thus, expect a demand boom for drugs, hospital services and medical insurance.
So, let’s highlight some cheap healthcare stocks to buy with substantial upside.
Tenet Healthcare (THC)
The market isn’t giving Tenet Healthcare (NYSE:THC) credit for its transformation. The hospital operator has fortified its ASC model and is selling hospitals at premium valuations to deliver its balance sheet.
Tenet operates in the two segments of hospitals and ambulatory or acute surgery centers (ASC). Management has prioritized the ASC model and has been selling hospitals at premium valuations over the past year. On April 1, it announced further sales of six hospitals in California.
As this transition continues, management thinks the market will reward the company with a higher valuation. For now, the company has been using the cash from its hospital sales to pay down debt. The operating momentum continues and the company delivered another strong performance in Q1 of 2024.
Further, revenues of $5.3 billion beat estimates by 4.6%, and EBITDA of $1.02 billion came in $195 million ahead of estimates. It retired $2.1 billion in debt, further reducing its leverage ratio to 2.79. And for the cherry on top, it raised FY2024 adjusted EBITDA guidance to a range of $3.5 to $3.7 billion. At a forward EV/EBITDA multiple of 7.6 times, THC stock is among the cheap healthcare stocks to buy.
Centene (CNC)
Another bargain in healthcare is one of the leading managed care providers in the U.S., Centene (NYSE:CNC). It provides government-sponsored and employer-sponsored insurance and is the largest Medicaid-managed care organization. At the end of 2023, Centene had over 27 million members and was the top Medicaid provider with over 14.5 million members.
In terms of growth, Centene has a very powerful tailwind. CMS expects government-sponsored healthcare spending to increase from $2.6 trillion in 2022 to $4.2 trillion by 2031. Management expects Medicaid spending to grow at a 5% compounded annual growth rate over the same period.
Capitalizing on this growth, management estimates the company will grow revenues by about 6-7% over the long term. In line with this view, management outlined a 12% to 15% long-term adjusted EPS growth rate at their December 2023 investor day.
Despite the impressive growth outlook, CNC stock is still cheap. According to Finviz, it trades at an attractive 16 times price-to-free cash flow. Moreover, in Q1 results, management raised FY2024 adjusted diluted EPS guidance to at least $6.8. Thus, at 11 times forward earnings, it is among the cheap healthcare stocks to buy.
Lastly, the company is boosting its capital allocation efforts to increase shareholder value. As of April 26, a $5.0 billion buyback authorization was available, meaning more returns going forward.
Johnson & Johnson (JNJ)
Iconic healthcare giant Johnson & Johnson (NYSE:JNJ) has had some challenges over the past year, and its stock has fizzled. Talc litigation issues have pressured the stock, while growth has underwhelmed investors compared to GLP-1 producers.
However, advances in the talc litigation settlement may present an opportunity. A conclusive agreement could trigger a rally in one of the most diversified healthcare stocks. With these lawsuits in the rearview mirror, its expansive portfolio of pharmaceutical drugs and medical devices will shine again.
Turning to the positives, the company is growing and profitable. Q1 reported sales rose 2.3% year-over-year (YOY). If you exclude Covid19 vaccines, adjusted operational growth was 7.7%. Profits grew faster, with adjusted EPS increasing 12.4% to $2.71.
In terms of full 2024 guidance, the company sees adjusted operational sales growing 5.8% at the midpoint. Furthermore, it expects adjusted diluted EPS to be in the range of $10.57 – $10.72. This EPS outlook represents growth of 6.6% – 8.1%.
Altogether, JNJ stands out in the cheap healthcare stocks basket. Using the midpoint of adjusted diluted EPS, it trades at 14 times FY2024 EPS. With 61 years of dividend growth and a 3.2% dividend yield, Johnson & Johnson is one of the top cheap healthcare stocks to consider.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
