A.I. could mean a 'decade of health care is upon us.' Here are some stock picks

Published Thu, Jul 6 202310:02 AM EDTUpdated Thu, Jul 6 202310:09 AM EDT

Investors hoping to capture more upside from artificial intelligence could turn to a sector that's underperformed this year, and maybe not immediately associated with AI: Health care. A handful of large tech names surged in the first half thanks to a mania for all things tied to artificial intelligence. Apple, for example, last week closed with a $3 trillion market capitalization for the first time. Nvidia is up by nearly 200% in 2023. Going forward, some of those gains might spill over to health care, which has underperformed this year. The sector is the third weakest out of 11 in the S & P 500, down about 3% year to date. "A lot of people talk about AI-powered performance and how that's going to impact the tech sector. And I think that's well understood," said Jamie Cox, managing partner for Harris Financial Group. "But what a lot of people fail to appreciate is that artificial intelligence and quantum computing are actually going to have the most impact on health care." Greater drug discovery The bull case for health care boils down to several factors including improvements made in drug discovery. According to a June note from Morgan Stanley, a 2.5% boost in early stage development success rates could mean a nearly 10% increase in new drug approvals over the next decade. In fact, the Wall Street firm expects that 60 additional drugs developed over 10 years could have an extra $70 billion in net present value (NPV) for the biopharma sector. NPV calculates the current value of a future stream of payments from a project or investment. "Higher probability of success and faster cycle times could boost investor perception of Biopharma business/revenue durability and close the P/E valuation gap" against more highly-valued sectors, the Morgan Stanley note read. Morgan Stanley highlighted a number of biopharma picks that could benefit from the trend, including pharmaceutical giants Johnson & Johnson , Merck and Pfizer , all three of which have fallen in 2023. The bank also named the U.S.-listed shares of Exscientia , a U.K.-based company that designs and discovers possible drugs using AI. Cox added that one overlooked health care and AI beneficiary would be Amazon , which he called a "sleeper" pick for investors. Amazon, which is already higher by 55% this year partly owing to AI enthusiasm, has a growing pharmaceutical and primary care business. This year, it closed a $3.9 billion transaction for primary health care provider One Medical . In 2018, Amazon bought PillPack in a $750 million transaction and launched its own online pharmacy. "This is the company that is largely focused on automation and efficiency, and the accrual of productivity gains to them is not well understood at this point," Cox said. The investor also called Rockwell Automation one of his stock picks that could benefit from AI in health care. The industrial stock is already up more than 25% this year. Recently, Mizuho said Rockwell also works as a play on the "reshoring" theme, whereby manufacturing returns to the U.S. UnitedHealth Group was another stock pick that Cox said would benefit from integration of artificial intelligence in health care. "The decade of health care is upon us," Cox said. "A lot of it is because of the R & D that happened from the pandemic but another part of it is that the AI components are actually going to accrue more so to healthcare than they are even to tech."