DaVita, a leading operator of dialysis centers, is navigating a turbulent market year, with its stock price slipping approximately 14% since January. Despite facing several challenges, including disappointing quarterly earnings and a cyberattack, there are potential upsides that suggest the company is not just a value trap. Notably, Berkshire Hathaway has been gradually reducing its stake due to an agreement that compels the company to repurchase shares if its ownership goes beyond 45%. DaVita’s international expansion and steady U.S. operations could lead to improved earnings and a higher valuation, given its current forward price-to-earnings ratio of 11.
In the pharmaceutical sector, Merck is grappling with the looming expiration of the patent for its blockbuster cancer drug, Keytruda, expected in 2028. The company’s stock currently trades at just nine times forward earnings, reflecting investor concern over potential revenue losses when generic versions of Keytruda enter the market. However, Merck has ambitious plans, including the introduction of Keytruda Qlex, which could mitigate sales declines, alongside a pipeline of 20 potential blockbuster drugs estimated to generate $50 billion in revenue. If these initiatives succeed, Merck could see its stock revalued upward to align with its peers.
Universal Health Services, valued at $13 billion, operates facilities for acute and behavioral health care. The company is trading at a significant discount compared to similar hospital operators, with a forward earnings multiple of just nine, while competitors like Tenet Healthcare and HCA Healthcare trade at 13 and 15 times earnings, respectively. Analysts believe that as Universal Health Services continues to grow its earnings, there is the potential for both price appreciation and a revaluation of its stock.
As investors navigate a volatile stock market, defensive sectors like healthcare are becoming increasingly attractive. While some investors may gravitate towards high-growth companies, there are opportunities to uncover undervalued stocks that may not have received adequate attention. The current economic climate offers a prime scenario for contrarian investors to explore these undervalued healthcare stocks, which may yield substantial returns in the long term.
