'A trove of rebound opportunities': Strategists turn bullish on biotech and more, picking top stocks

Published Tue, Jan 16 20246:20 PM EST

2023 wasn't a good year for the health-care sector, but some investors expect it to make a comeback this year — highlighting biotech and medical tech as areas to watch. "Emerging from a poor capital raising environment in '22-23, where early-stage biotech companies grappled to fund their Research and Development efforts amid rising interest rates, the battered sector finally is seeing a revival in Mergers and Acquisition deals as the new year begins," Citi Global Wealth Investments said in a Jan. 14 note. There's already been about $9.6 million worth of transactions so far in January, the bank noted. As a sector, health care underperformed the broader market last year, with the iShares U.S. Healthcare ETF gaining only around 2% for 2023. But now, Citi believes that "astute investors may find themselves with a trove of rebound opportunities." It urged investors to reflect on the "inherent resilience" of health care over the long term, noting that the sector recorded positive earnings growth over the three recent global earnings recessions. "As macro tides shift, we see health care as an unstoppable trend beneficiary, with growth prospects well beyond the anti-obesity drugmakers," Citi said. GLP-1 (glucagon-like peptide-1) drugs, originally developed as a treatment for diabetes but now popularly used for weight loss, shook up the sector last year. The health-care industry "appears ready to return to leadership," given demographic shifts and the benefits of artificial intelligence, the bank said. "We expect the healthcare earnings recovery in 2024 to be one of the main drivers of potential outperformance in the sector," it added. Investing picks and tips Citi said it is "particularly drawn to" discounted valuations in the medical technology and tools segments, while biotech "seems like a high-risk, high-reward bet" as interest rate cuts are expected to begin. Growth stocks such those in tech and biotech usually benefit from rate cuts. Citi's top picks in biotech include Biomea Fusion , Alnylam Pharmaceuticals , and Immunovant . Jared Holz, health-care sector strategist at Mizuho Securities Americas, named biotech firm Biogen as one of his top trading ideas for 2024. He said 2024 looks like it'll be a better year for Biogen as it appears set for a "full-year" of sales in its Alzheimer's treatment Leqembi. He noted that Biogen is coming up with an injectable version that "should improve uptake dramatically longer-term." Holz added that Biogen remains in a "solid position" to acquire other assets and is small enough that it could at some point even be a target for acquisitions itself. As for medtech, Citi described some medical device makers as "necessary 'picks and shovels' for drug development." Some work together with biopharmaceutical partners in areas such as the formulation and packaging of drugs, while others produce devices worn or implanted in the body for conditions such as heart disease or diabetes. Citi highlighted another investment opportunity: the makers of equipment used in robotics-assisted surgery. And Trent Masters, global portfolio manager at Alphinity, on Tuesday flagged surgical robotics maker Intuitive Surgical as one of his "top conviction calls." "Most of medtech got severely impacted by GLP1 mania in October last year, where it seemed the expectations were that GLP1 drugs were going to make everyone healthier and take away the need for procedures," he said. "But what we are seeing now across medtech is more nuance around longevity being a positive for procedures to balance out the potential loss from a healthier population," Masters added. As for those who'd rather invest in an exchange-traded fund than in individual stocks, Matt Orton, chief market strategist at Raymond James Investment Management, says he prefers the health-care sector right now and likes the iShares U.S. Medical Devices ETF. "Biotech has commanded everyone's attention, but the recovery of many best-in-class medical device companies post the GLP-1 selloff has been remarkable," Orton said. "I think there is still room to run for names like DexCom , Intuitive Surgical, Abbott Laboratories and this ETF is the best way to get exposure," he added.