Healthcare has been one of the toughest parts of the market in recent years. Over the past five years, the sector has lagged the ASX by roughly 50% and is the only sector to deliver a negative total return across that period. A combination of regulatory uncertainty, post-COVID normalisation and slower earnings growth has kept many investors on the sidelines.
When Senior Investment Analyst Daniel Martin, was interviewed on ausbiz this week, he discussed why this persistent underperformance is creating opportunities for long term, fundamentals-driven investors.
Daniel noted that our investment approach does not rely on sector calls. Instead, we use a risk-adjusted framework to uncover businesses where long term economics are being undervalued by the market. Healthcare is currently providing several examples of that dynamic.
Sonic Healthcare (ASX: SHL)
Sonic has built a global diagnostics network spanning pathology, laboratory and radiology services, now serving around 130 million patients each year. The business emerged from the COVID period with a strengthened balance sheet, having used temporary earnings tailwinds to reduce debt and build further international scale.
While the transition to new leadership after three decades has introduced some hesitation among investors, the underlying numbers remain compelling. Sonic generates a free cash flow yield near 7%, returns capital consistently to shareholders, and trades on a P/E of around 21x – slightly below the ASX200 average despite its strong global footprint.
Importantly, Daniel highlighted that several legacy contracts, signed under less favourable conditions, are now being renegotiated. This offers scope for margin improvement over time and represents an upside lever the market may be undervaluing.
Zoetis (NYSE: ZTS)
Zoetis is the global leader in animal health pharmaceuticals, with a portfolio spanning companion animals and livestock. Despite facing increased competition and softer discretionary spending in some segments, the company continues to deliver solid revenue and profit growth.
What stands out is the disconnect between the share price and the underlying fundamentals. Zoetis’ market cap has returned to 2019 levels, yet the business today is materially stronger. Revenues are about 50% higher, and profitability roughly two thirds higher. High margins, steady R&D investment and durable global demand give Zoetis a long runway of defensible growth.
A sector priced for pessimism
Healthcare remains priced for ongoing disappointment. But for investors focused on durable business models rather than short term sentiment, this environment is creating selective opportunities. Companies with resilient cash flows, improving fundamentals and mispriced long term growth potential continue to stand out.