In the U.S. market, the energy and healthcare sectors have underperformed and offer more investor value, Daniel Rohr, head of global equity research at Morningstar, said at a media briefing with Shenton Wire Friday.
The S&P 500 has run up more than 25 percent so far this year. But as of mid-November, the healthcare sector was only up 15 percent and energy had only gained 6 percent.
Rohr said energy has been the biggest underperformed this year, with the sector making up less than 5 percent of the U.S. stock market, down from 13 percent in 2008.
“Sentiment in energy has been truly awful for quite some time in the United States,” he said. “The bad sentiment is a function of volatility and a perceived lack of profitability and that’s even though many of the U.S. independents and oil majors are generating strong free cash flows in the prevailing market environment.”
The higher quality U.S. share producers look “quite attractive,” Rohr said. “This is a baby getting thrown out with the bathwater phenomenon. There are some producers that happen to have very attractive economics by virtue of having wells in very attractive locations.”
Rohr said Morningstar’s top pick in the segment is Diamondback Energy, with a US$102 fair value and a rating of four out of five stars. The share ended down 1.5 percent on Friday at US$77.34.
Diamondback Energy is a “very low cost producer,” he said, adding the company would be fine if oil prices were to fall as Low as US$30 a barrel, compared with Morningstar’s long-term oil price forecast for US$55 a barrel.
Within the sector, Morningstar also has four-star ratings on Enbridge and Schlumberger.
Within healthcare, most of the sector underperformance is concentrated in drug manufacturers and biotech, Rohr said.
“These stocks have fared quite poorly, largely due to concerns around political intervention in drug pricing. And that’s certainly a valid concern. The concern gets less and less visceral when you’re talking about pipelines that are being developed to fulfill medical needs that are being unmet,” Rohr said.
“Historically, regulators have given drug manufacturers more leeway when it concerns pricing for drugs that meet unmet medical needs. So the buy calls we’re making in drug manufacturers and biotechs largely has to do with the pipeline to meet unmet medical needs,” he added.
Among Morningstar’s top sector picks is four-star-rated AbbVie, which has been weighed by concerns over losing its patent exclusivity on Humira in 2023 and its leverage after buying Allergan, Rohr said. But he added, AbbVie’s drug pipeline in the immunology segment should put the company a strong growth trajectory.
Five-star rated Biomarin Pharmaceutical is also among Morningstar’s top picks on a strong gene therapy pipeline and its products to treat rare genetic diseases, which don’t have much competition.