Key Takeaways

• The US stock market is trading at an 8% discount.

• Investors should look to market-weight stocks overall but overweight value and core.

• Sector valuations rise toward fair value from deeply undervalued levels, and energy is increasingly attractive.

May 2025 US Stock Market Outlook and Valuation

As of April 30, 2025, according to a composite of our valuations, the US stock market is trading at an 8% discount to fair value, the same level as at the end of March. However, the month-end calculation fails to capture the market’s plunge in early April after the US announced tariffs and its subsequent rebound. For example, the price/fair value fell as low as a 17% discount on April 4, 2024. At that level, we recommended a move to an overweight position as we thought that the discount was more than enough of a margin of safety for long-term investors.

Stocks subsequently rallied following the announcement of a 90-day pause on tariffs as trade negotiations began. Considering how quickly the market has rebounded and valuations have bounced back, we think now is a good time to lock in profits on that overweight position and move back to a market-weight stance.

Eye of the Hurricane

The earliest signs of the impending stock market hurricane emerged in March as the bear market in artificial intelligence stocks led the broad market downward. Yet, this was a tempest in a teapot as the storm hit once President Donald Trump announced the tariffs. Stocks quickly plunged over the next week, hitting an official bear market as the Morningstar US Market Index bottomed out at a 20% correction from its highs.

Seemingly just as quickly, the skies began to clear as President Trump announced that he would pause those tariffs for 90 days to allow trade negotiations to commence. Stocks surged higher and have recaptured those losses, bringing the market valuation back to where it was at the end of March.

Heading into May, it appears that we are in a period of relative calm. Yet, we think there is a high probability of more volatility yet to come. Trade negotiations have reportedly begun, yet finalized agreements don’t appear to be anywhere near fruition. The deadline for the 90-day pause isn’t until July 8, and we suspect it won’t be until we are nearing that deadline that new agreements may be finalized.

In the near term, we think the economy and corporate earnings will be distorted by a few factors. First, we have already seen a significant amount of purchasing ahead of the tariffs, which pushed down the first-quarter gross domestic product. Second, we suspect supply and transportation dislocations will result in numerous disruptions and earnings distortions. Lastly, Morningstar’s US economics team had already projected that the rate of real economic growth would slow sequentially throughout 2025, and these dislocations will likely exacerbate this trend.

If we are correct, and the stock market suffers another selloff, we recommend keeping enough dry powder to move back to an overweight position once valuations warrant.

Should You Sell in May and Go Away?

There is an adage to “sell in May and go away” as market returns are seasonally subdued over the summer. With the market still trading at a reasonable discount to fair value, we’d recommend that long-term investors remain at a market-weight position. Yet, with the economy slowing, the Federal Reserve likely on hold for now, and trade negotiations and tariff disruptions on the horizon, we think positioning will be especially important to hedge against a potential summer swoon.

We think investors can position themselves to ride out near-term spring and summer turbulence in stocks:

With long-term durable competitive advantages as indicated by a wide or narrow Morningstar Economic Moat Rating.

With an Uncertainty Rating of Low to Medium.

Trading at a significant margin of safety below our valuation

That have an attractive dividend yield.

That are in the value category, which will benefit from ongoing rotation out of the growth category.

That are in defensive sectors, which should benefit from a rotation out of economically cyclical sectors.

Based on our valuations, by style, we advocate that investors:

Overweight value stocks, which trade at a 12% discount to fair value.

Overweight core stocks, which trade at an 11% discount to fair value.

Underweight growth stocks, which trade at a 3% premium to fair value.

Sector Valuations

Since our market update on April 9, sector valuations have generally moved higher in relation to the broad market rebound. The greatest laggard has been the energy sector as oil prices have continued to slide lower. The energy sector is now the second-most undervalued sector, following the communications sector. The consumer cyclical and real estate sectors are tied as the third-most undervalued sectors.

The consumer defensive sector remains the most overvalued, yet the sector valuation is skewed into overvalued territory by Costco COST and Walmart WMT , which have 1-star Morningstar Ratings, and 2-star-rated Procter & Gamble PG . These three stocks account for 31% of the market capitalization of the index. Excluding these three stocks, the rest of the sector trades at a more reasonable 6% discount to fair value. The utilities and financial-services sectors are the next two most overvalued sectors, but their overvaluation is more widespread, and few stocks are rated 4- or 5-stars.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

Let’s face it: volatility is an unavoidable feature of the stock market. Even the most stable companies will experience price movements from time to time. Unless you put your money in a GIC (or a savings account), no investment can ever guarantee to return the money you invest, no matter how profitable the company seems.

That said, some stocks are far more stable than others. We call these “safe and low volatility stocks.” Below, we’ll discuss some examples of safe stocks, as well as how you can pick them out on your own.

What are safe and low volatility stocks?

Safe and low volatility stocks are those stocks who have a relatively stable annual rate of return. That’s not to say the annual rate of return is high, nor is it to say it’s low. It’s only to say that, when compared with other stocks, safe stocks are more predictable.

For example, let’s say we have two stocks, Stock A and Stock B. Over a five year period, here’s what the average annual rate of return looks like for these two stocks:

Stock A Stock B Year Annual Rate of Return Annual Rate of Return 1 16.5% 6.2% 2 4.7% 5.9% 3 19.4% 5.4% 4 – 6.8% 4.5% 5 11.1% 5.7% Average over 5 years 8.98% 5.54%

As you can see, Stock A has a higher average annual rate of return (8.98%), but its volatility is also greater. In Year 3, for instance, Stock A makes an extraordinary leap to 19.4%, but then in Year 4, it performs poorly, coming out with negative returns.

In contrast, Stock B may have a lower average annual rate of return, but its rate is more predictable. Based on this small sample, we can expect Stock B to average around 5% to 6% each year, and we would most likely call Stock B a safe stock.

Another way of looking at volatility is to analyze a stock’s beta, which is a number given to a stock to measure its risk. Typically, the market has a beta of 1.0, with numbers above 1.0 being more risky and numbers below 1.0 more safe. If a stock has a beta of, say, 0.33, you know it’s probably less volatile than a stock that has a beta of 1.54.

The Benefits of Low Volatility Stocks

Reduced Risk: As the name suggests, low volatility stocks tend to exhibit less dramatic price swings, reducing the overall risk in an investment portfolio. While no investment is risk-free, these stocks can offer relative stability compared to more volatile alternatives. Consistent Returns: Low volatility stocks often deliver consistent returns over the long term. Their performance may not be as explosive as high-growth stocks, but they provide dependable dividends and price appreciation. Peace of Mind: For conservative investors or those relying on their investments for retirement, low volatility stocks offer peace of mind. Knowing that your investment is less likely to experience extreme declines can help you sleep better at night. Resilience in Economic Downturns: Companies behind low volatility stocks usually have strong business fundamentals, allowing them to weather economic downturns more effectively. Their products or services often remain in demand even during tough times, contributing to stability.

What are some examples of safe stocks to invest in?

Again, while all stocks experience volatility, some are more resistant to price movements. Here are just five Canadian safe stocks that could deliver consistent returns over a long period of time.

Fortis

The utility stock Fortis (TSX:FTS) has perhaps one of the lowest betas on the market, right now at an ultra low of .08. This gives Fortis stability from massive movements in the market, which could protect your investment from downside risks. What’s even better is that Fortis has a solid dividend: for 48 years in a row, Fortis has increased its dividend, which sits at around 3.67% right now.

BCE

BCE (TSX:BCE) is one of Canada’s top three telecommunication companies. It has a recurring source of income—clients who need digital services—which is one reason BCE has a low beta of .33. With the demand for digital services growing, from remote work to digital learning, BCE is less vulnerable to severe market volatility, andi it has a hefty dividend, too.

Bank of Nova Scotia

As the third largest bank in Canada, Bank of Nova Scotia (TSX:BNS) has a low beta (.83) and a hefty dividend yield. Given that the banking industry is highly regulated, which makes it hard for small banks to displace bigger ones, Bank of Nova Scotia enjoys unquestioned stability. That makes it an attractive stock for investors who don’t like volatility, as it’s unlikely this stock will see enormous price movements.

Waste Connections

Like most low volatility stocks, Waste Connections (TSX:WCN) provides an essential service: to collect, transfer, and dispose of non-hazardous waste. The company enjoys a low beta (.73), and it has increased its dividends by double digits over the last eleven years.

NorthWest Healthcare Properties REIT

NorthWest Healthcare Properties REIT (TSX:NWH.UN) owns and operates 192 healthcare properties with 2,000 tenants across seven countries (Canada, the UK, Australia, New Zealand, Brazil, the Netherlands, and Germany). It, too, has a low beta (.79), and its stable sources of income, not to mention the long-term contracts on its tenants, protect this stock from greater volatility.

RELATED: Investing in REITS: Top Canadian REITS

4 ways to identify safe stocks to invest in

Here are four characteristics of safe stocks to keep an eye out for when picking which stocks to invest in.

1. Steady revenue

The foundation of a stable stock often lies in the company’s ability to generate consistent and growing revenue. Companies that demonstrate reliable revenue streams are generally more capable of navigating economic uncertainties and market fluctuations.

Market Positioning : These firms are usually well-positioned in their respective markets, often holding significant market share that serves as a buffer against competitors.

: These firms are usually well-positioned in their respective markets, often holding significant market share that serves as a buffer against competitors. Predictability : Steady revenues indicate predictability in a company’s business model. This predictability reassures investors that the business can sustain operations and meets its financial commitments, even when faced with economic headwinds.

: Steady revenues indicate predictability in a company’s business model. This predictability reassures investors that the business can sustain operations and meets its financial commitments, even when faced with economic headwinds. Operational Efficiency: Companies with consistent revenue often have efficient operations and a deep understanding of their market, allowing them to adapt to changes without experiencing significant financial setbacks.

2. Continues to pay dividends

Dividends are a tangible sign of a company’s financial health and management’s commitment to returning value to shareholders. Companies that consistently pay—and potentially increase—dividends during economic downturns illustrate resilience and financial strength.

Total Returns : Dividends contribute significantly to a stock’s total return, enhancing its appeal to long-term investors seeking regular income in addition to capital appreciation.

: Dividends contribute significantly to a stock’s total return, enhancing its appeal to long-term investors seeking regular income in addition to capital appreciation. Dividend History : Examining a company’s dividend history provides insights into its cash flow management and operational stability. A continuous or growing dividend payout, especially during tough times like the COVID-19 pandemic, suggests robust underlying business fundamentals.

: Examining a company’s dividend history provides insights into its cash flow management and operational stability. A continuous or growing dividend payout, especially during tough times like the COVID-19 pandemic, suggests robust underlying business fundamentals. Investor Trust: Dividend payments convey management’s confidence in the company’s long-term profitability and health, fostering investor trust.

3. Not in a cyclical market

Cyclical stocks are those that typically perform well during periods of economic growth but suffer during downturns. These include industries such as travel, automotive, luxury goods, and most notably, the consumer discretionary sector. When economic conditions tighten, consumers tend to cut back on non-essential spending, directly impacting the revenues—and stock prices—of companies in these sectors.

In contrast, non-cyclical (defensive) stocks are found in sectors that provide essential goods and services regardless of economic conditions. Stocks in non-cyclical sectors are generally more stable and resilient during economic stress, making them attractive to risk-averse investors or those aiming to preserve capital. By avoiding highly cyclical stocks, investors can reduce exposure to sharp downturns and maintain more consistent portfolio performance over time.

Non-cyclical markets include:

Utilities (electricity, water, gas)

(electricity, water, gas) Healthcare (pharmaceuticals, medical services)

(pharmaceuticals, medical services) Consumer staples (food, hygiene products, household essentials)

(food, hygiene products, household essentials) Some sectors, such as the financial and utilities market sectors, exhibit moderate cyclicality. While affected by interest rates and credit markets, banks and insurance companies provide core services that support overall economic function, offering relative stability compared to fully cyclical sectors.

Demand for these goods remains consistent even in recessions, making these sectors—and the companies within them—more insulated from market volatility.

4. Competitive advantages over similar brands

A competitive edge ensures a company can maintain its market position and fend off competitors, which is vital for long-term stability and growth.

Barriers to Entry : High barriers to entry protect established companies from new competitors. These might include proprietary technology, significant capital requirements, or regulatory protections.

: High barriers to entry protect established companies from new competitors. These might include proprietary technology, significant capital requirements, or regulatory protections. Strong Brand Recognition : A recognizable and trusted brand often commands customer loyalty, enabling consistent sales even in competitive markets. Companies like Coca-Cola or Apple illustrate the power of brand strength in maintaining market authority.

: A recognizable and trusted brand often commands customer loyalty, enabling consistent sales even in competitive markets. Companies like Coca-Cola or Apple illustrate the power of brand strength in maintaining market authority. Cost Efficiency and Innovation: Companies with leading-edge technologies, effective supply chains, or cost-effective operations can deliver products at lower prices or higher margins than competitors, securing sustained competitive advantages.

Should I invest in safe stocks?

As noted above, no stock is immune to market volatility. Even safe stocks will take a hit from time to time. What makes safe stocks more reliable than other stocks, however, is their resilience: no matter what happens to the overall economy, these stocks are typically the least affected.

Of course, even with safe stocks, you should still aim to diversify your stock portfolio. Though safe stocks are less volatile than growth stocks, some safe stocks are less volatile than others. Spread your money across numerous safe stocks, and you’ll build a stronger safety net than if you invest in one or two.

For beginner investors, safe and low volatility stocks could be a less risky way to start investing in the stock market.

If that sounds right to you, then start by looking for stable companies, buy stock through one of Canada’s best online brokerages, and hold your stock for the long-run.

The economy isn’t recession-proof. It often follows a somewhat predictable, if irregular, pattern known as the economic cycle. Periods of expansion can often last for years before hitting a peak. What follows is a period of contraction — a recession — before the economy enters a trough ahead of the next expansion. Recessionary periods can be brutal for investors. Stock market corrections and bear markets commonly occur during the contraction phase. Cyclical stocks — companies in industries highly sensitive to the economic cycle — are often the hardest hit during a recession. However, some stock market sectors are relatively immune to the ups and downs of the economic cycle. They offer investors somewhat recession-proof stocks that they can hold when economic turbulence arises. That’s evidenced by the fact that many companies in these sectors have increased their dividends every year for the past few decades, which included several notable recessions. Here’s a closer look at where to invest if you’re worried that the economy is about to hit a rough patch.

Utility companies Utility companies Even when businesses close and people lose their jobs during recessions, demand for electricity, water, waste collection, and natural gas remains relatively stable. Utilities and utility-like companies generate reasonably consistent earnings throughout recessions. Some examples of utility-type companies include: American Water Works ( AWK -0.39% Brookfield Infrastructure ( BIPC 2.16% BIP 0.51% infrastructure company owns utilities, pipelines, power lines, data centers, cell towers, and a range of other infrastructure assets. Its businesses generate contractually secured or government-regulated cash flows that remain stable during a recession. NextEra Energy ( NEE 1.25% electric utility and a leading energy resources business that produces renewable energy, transports natural gas, and provides electricity. Its businesses generate stable revenues secured by government-regulated rates and long-term, fixed-rate contracts. The utility has increased its dividend for 30 straight years. Williams ( WMB -0.26% natural gas infrastructure giant operates critical pipelines that move gas and other energy commodities from production basins to market centers. Williams’ assets generate stable cash flows backed by long-term contracts or government-regulated rates. WM ( WM -0.64%

Definition Icon Cloud Computing Cloud computing is a network of interconnected servers and data centers working together to deliver a service through the Internet.

Cost-conscious retail Cost-conscious retail Consumers tend to spend carefully during recessions. Many people begin buying less-expensive items. They also typically eliminate optional expenses, such as paying professionals to take care of routine home and car maintenance. Instead, they usually spend more money at dollar stores, home improvement centers, discount retailers, and auto parts stores. Some examples of retail companies that typically benefit from recessions include: Walmart ( WMT 0.29% Dollar General ( DG 15.91% Home Depot ( HD 1.47% Costco ( COST -0.06% Realty Income ( O -1.01% retail real estate investment trust (REIT) focuses on owning income-producing properties leased to recession-resistant retailers. Its portfolio features grocery, convenience, dollar, home improvement, and drug stores. The REIT has delivered 30 years of consecutive annual dividend increases.

Definition Icon Dividends Per Share The dividends a company pays out per share and a commonly used per-share metric.

Diversified portfolios Diversified portfolios better withstand recessions Recessions are inevitable, so investors should construct truly diversified portfolios to weather downturns. The key to creating a diversified portfolio is investing in companies across multiple sectors, including recession-resistant ones. Any diversified portfolio should include a mix of financially strong blue chip stocks with the financial fortitude to withstand a recession. Blue chip stocks are attractive to investors during recessions because they typically pay dividends, providing them with a tangible return in the form of income. Blue chip stocks in recession-resistant industries tend to be especially stable, which can help lessen the blow of a market sell-off from a recession.

Related investing topics

Recession-proof businesses Add some recession-proof businesses to your portfolio The hottest stocks in recent years have been in the technology and communications industries. Many investors found it easy to build a portfolio that skewed toward these growth-focused sectors by buying stocks related to megatrends such as 5G, streaming services, cloud computing, social media, and artificial intelligence (AI). Unfortunately, these sectors are not immune to a recession. An economic slowdown could cause businesses to reduce capital spending, which might cause them to cut back on expensive upgrades to 5G or cloud computing. Companies also tend to pull back on advertising during recessions, hurting ad-driven sectors such as social media and some streaming services. As previously noted, consumers tend to eliminate extra costs during recessions, which can affect streaming services and other entertainment options. That’s why it’s important to diversify your portfolio to better withstand a recession by adding some defensive or countercyclical stocks in the consumer staples, utilities, bargain retailing, and healthcare industries. Doing so can help your portfolio blunt some of the potential negative impacts of a recession.

FAQ

FAQ on recession-resistant stocks What stocks do well in a recession? angle-down angle-up Companies with durable demand for their products or services tend to do best during a recession. Often called defensive stocks, these companies sell products or offer services people need, regardless of economic conditions. Many healthcare, consumer staples, utility, and cost-conscious retail companies do well in a recession. What stocks should I buy before a recession? angle-down angle-up You should consider buying economically resilient or defensive stocks before a recession. These include healthcare, consumer staples, utilities, and cost-conscious retail companies. Demand for the products and services provided by these companies tends to hold up relatively well during a recession, which should enable their stock prices to hold up or continue gaining value. What stocks to avoid during a recession? angle-down angle-up You should avoid cyclical stocks during a recession. These companies need the economy to be in an expansionary phase to thrive, so their earnings and share prices tend to decline sharply during a recession. Where is your money safest during a recession? angle-down angle-up During a recession, your money is safest in places with little to no risk of loss. Low-risk places to put your money include savings accounts, money market funds, certificates of deposits (CDs), or government bonds. Investment-grade corporate bonds and high-quality defensive stocks are also relatively safe places to invest money during a recession. Many people also advocate buying gold or silver during a recession.

Energy stocks appeal to investors for a few different reasons:

Energy stocks tend to perform independently of other types of stocks, so investors buy them to diversify their portfolios.

Many energy stocks offer attractive yields and therefore appeal to investors who like high-dividend stocks.

They provide investors with a way to play rising oil prices.

Energy stocks can help hedge against inflation, as oil and gas prices typically rise during inflationary periods.

In the year to date, the Morningstar US Energy Index fell 2.88%, while the Morningstar US Market Index gained 1.07%. The energy stocks that Morningstar covers look 14.2% undervalued on average.

Year-to-Date Performance of Energy Stocks Source: Morningstar Direct. Data as of May 27, 2025.

The 12 Best Energy Stocks to Buy Now

These were the most undervalued energy stocks that Morningstar’s analysts cover as of May 27, 2025.

Halliburton HAL ChampionX CHX Weatherford International WFRD Schlumberger SLB Occidental Petroleum OXY HF Sinclair DINO NOV NOV BP BP ExxonMobil XOM ConocoPhillips COP Devon Energy DVN Equinor EQNR

To come up with our list of the best energy stocks to buy now, we screened for:

Energy stocks that are undervalued, as measured by our price/fair value metric.

Stocks that earn narrow or wide Morningstar Economic Moat Ratings, as well as companies that do not have a moat. We think companies with narrow economic moat ratings can fight off competitors for at least 10 years; wide-moat companies should remain competitive for 20 years or more.

Energy stocks with Morningstar Uncertainty Ratings lower than Extreme. This captures a range of confidence levels around estimating the companies’ fair values.

Here’s a little more about each of the best energy stocks to buy, including commentary from the Morningstar analysts who cover each company. All data is as of May 27, 2025.

Halliburton Energy Services

Morningstar Price/Fair Value: 0.64

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

Forward Dividend Yield: 3.41%

Industry: Oil & Gas Equipment & Services

Oil and gas equipment and services company Halliburton Energy Services is the cheapest stock on our list of the best energy stocks to buy. Halliburton is North America’s largest oilfield service company as measured by market share. The stock is trading 36% below our fair value estimate of $31 per share.

After a century of operations, Halliburton is the world’s premier wellbore engineering firm. The company made a historic bet on US shale, which ensured its position as North America’s premier oilfield-services company. The company tailors its pressure-pumping solutions to drive down producers’ development costs. The advantages here are fleeting and require constant innovation in an increasingly smaller profit pool. Still, we think Halliburton will remain in a leadership position. Outside capital remains uninterested in funding would-be competitors following prior boom-and-bust cycles. Both US producers and services firms are now far more capital-disciplined. Producer discipline ensures good utilization rates for Halliburton’s equipment and creates a more certain operating environment for integrated services firms with scale. Halliburton also generates strong internal cash flow that funds differentiated solutions with pricing power. In pressure pumping, the solution we like best is its electric fracturing equipment. Despite the higher upfront cost, customers value this equipment since it lowers their total cost of ownership and reduces their emissions. Halliburton also holds a solid competitive position in drilling and evaluation, trailing only SLB. These solutions are less moaty than its completions solutions. But they still command differentiation, particularly in drilling. Halliburton’s latest generation rotary steering solution should deliver pricing power and decent incremental returns. Drilling’s growth outlook should also improve longer-term, given the lower inventory of drilled but uncompleted wells in the US. Many of these wells remain unviable for production. Finally, the near-term outlook for US shale looks bleak, especially following secondary tariff-related impacts. US capital spending is far more short-cycled and susceptible to commodity price swings. So, Halliburton’s offshore business outside of North America will carry greater importance. Offshore international is roughly only a fourth of its revenue mix. But we still think the firm is well positioned here given its strong execution on complex completions with higher revenue content. Joshua Aguilar, Morningstar director

Read more about Halliburton Energy Services here.

ChampionX

Morningstar Price/Fair Value: 0.65

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: None

Forward Dividend Yield: 1.54%

Industry: Oil & Gas Equipment & Services

ChampionX provides chemical solutions and equipment for onshore and offshore oil and gas production. This cheap energy stock looks 35% undervalued and has a fair value estimate of $38 per share.

ChampionX is a diversified oilfield-services firm providing specialty chemicals solutions and artificial lift services for oil and gas development and production. It also manufactures polycrystalline diamond cutter inserts for drilling and mining rigs. About two thirds of ChampionX’s overall business involves specialty chemicals. The firm is one of the largest specialty chemicals providers in oilfield services: ChampionX and Baker Hughes together control roughly half of the global market. SLB’s announced acquisition of ChampionX will continue the focus on cost synergies. ChampionX’s digital revenue streams are especially desirable, given their asset-light nature compared with the otherwise capital-intensive oilfield-services industry. The firm also seeks to diversify internationally, which SLB will support. Upon closure of the deal, we expect the combined firm will slightly reduce revenue volatility. The North American market tends to be much more reactive to changes in oil and gas prices than international markets. We think ChampionX’s existing capabilities leaves the firm well positioned to benefit from an advantageous operating environment over the next several years, as strong oil and gas production worldwide fosters strong demand (and favorable pricing) for oilfield services. We’re also optimistic about the firm’s plans for enhancing profitability via internal cost management and strategic repositioning, and SLB as its proposed acquirer is calling for $400 million of annualized pretax synergies. We expect the acquisition will close in the second or third quarter. Joshua Aguilar, Morningstar director

Read more about ChampionX here.

Weatherford International

Morningstar Price/Fair Value: 0.65

Morningstar Uncertainty Rating: Very High

Morningstar Economic Moat Rating: None

Forward Dividend Yield: 2.19%

Industry: Oil & Gas Equipment & Services

Next on our list of the best energy stocks to buy is Weatherford International. Weatherford International provides diversified oilfield services across international markets for an array of oilfield types. The stock is trading at a 35% discount to our fair value estimate of $70 per share.

Weatherford International is one of the larger oilfield-services firms in an otherwise hyperfragmented industry. However, in terms of size, it remains some distance from the industry’s Big Three: SLB, Baker Hughes, and Halliburton. Weatherford’s central goals remain debt management, margin expansion, and ultimately, ongoing positive free cash flow generation. Internal cost reduction will mostly derive from operational consolidation as management rightsizes operations for a business commanding $3 billion-$5 billion in annual revenue (compared with $15 billion, as seen in the years preceding the 2015 crash in oil prices). The firm’s many divestitures since 2018 year-end include infrastructure-related assets and historically unprofitable business lines, like surface data logging and lab services. Moving forward, management indicates each of its business lines must be independently profitable in each geographical region to avoid divestiture. Weatherford nevertheless maintains a diverse product portfolio targeting at least 16 different production applications. We expect cross-selling will be a key strategy as well operators’ increasing prioritization of production optimization strengthens the potential value add from service integration. As Weatherford progresses through its internal optimization initiatives, management remains steadfast in its intention to target profitability potential over market share gains across regions. We expect this will stabilize the firm’s through-cycle profitability in an otherwise volatile industry, though the strategy is not without possible drawbacks. Despite the currently favorable pricing environment, we expect price competition will remain prevalent over the long run, and prioritizing higher-margin projects may significantly reduce the number of contracts worth pursuing. It’s also possible that reduced market share may limit cross-selling potential over time. We nevertheless expect demand for oilfield services over the next five years will remain elevated, supporting profitable growth for Weatherford over the near to medium term. Joshua Aguilar, Morningstar director

Read more about Weatherford International here.

Schlumberger

Morningstar Price/Fair Value: 0.67

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Narrow

Forward Dividend Yield: 3.36%

Industry: Oil & Gas Equipment & Services

SLB is the world’s premier oilfield-services company as measured by market share. Schlumberger is an affordable energy stock, trading at a 33% discount to our fair value estimate of $51 per share. The oil and gas equipment and services company earns a narrow economic moat rating.

SLB focuses its strategy through three growth engines: core, digital, and new energy. Our thesis mostly relies on SLB’s first two growth engines, specifically its offshore business outside of North America and its digital offerings. Market bears seem concerned over a possible recession, a slowdown in the exploration and production capital expenditure cycle, and that the acquisition of ChampionX dilutes shareholder value. We disagree that ChampionX diluted value and think parts of the cycle could be more resilient than the market appreciates. The cycle is indeed turning in North America amid customer consolidation. We also expect the broader market will face reductions in discretionary short-cycle spending given concerns about an oversupplied oil market, weak demand in China, and an economic slowdown from tariffs. Still, the fundamentals underlying long-term, international offshore spending look largely intact. From this standpoint, SLB is well positioned since it’s the premier global oilfield-services company. It boasts an oligopolistic foothold in some of the most attractive market segments thanks to its record of innovation. Furthermore, over three fourths of its business is exposed to markets outside North America. Industry figures frequently cite roughly $100 billion in final investment decisions in 2026. Despite near-term headwinds, the Middle East and deepwater projects in Latin America and West Africa strike us as among the most attractive long-term opportunities, and we think SLB will capture its healthy share of project wins. SLB also holds an industry-leading position in digital, whose revenue is sticky, highly accretive to margins, and decoupled from cyclical headwinds. Digital enjoys these attributes because it helps reduce customers’ cycle times while also lowering their cost of production. We believe SLB’s digital revenue will grow at a double-digit CAGR through our forecast. We fully credit SLB with extracting $400 million in annualized pretax synergies in its third year following the close of the ChampionX acquisition, which we model at a 100% probability. If we’re right, we think the acquisition will create over $2 billion in shareholder value. Joshua Aguilar, Morningstar director

Read more about Schlumberger here.

Occidental Petroleum

Morningstar Price/Fair Value: 0.71

Morningstar Uncertainty Rating: Very High

Morningstar Economic Moat Rating: None

Forward Dividend Yield: 2.31%

Industry: Oil & Gas E&P

Occidental Petroleum is an independent exploration and production company with operations in the United States, Latin America, and the Middle East. The stock is trading at a 29% discount to our fair value estimate of $59 per share.

Occidental is one of the world’s largest independent oil and gas producers. Its upstream operations are spread across the US, Middle East, and North Africa. It has a consolidated midstream business, which provides gathering, processing, and transport services to the upstream segment, and it holds a majority equity interest in Western Midstream. The portfolio also includes a chemicals business, which produces caustic soda and PVC. The latter segment benefits from low energy and ethylene costs, while its profitability is determined by the strength of the broader economy. The $55 billion Anadarko deal was a huge undertaking for Oxy, which itself had an enterprise value of about $50 billion at the time. The cash portion was partly financed with a $10 billion preferred equity investment from Berkshire Hathaway along with the proceeds from the sale of Anadarko’s Mozambique assets, which Total purchased for $3.9 billion in late 2019. While these arrangements left Oxy with a heavy debt burden prior to the pandemic, drastic measures helped management steady the ship, and the firm took full advantage of the subsequent rebound in commodity prices, generating enough cash to fully repair the balance sheet and pave the way for significant capital returns. The firm is obligated to match distributions above $4 per share annually with preferred equity redemptions. The midstream segment also includes Oxy Low Carbon Ventures, which partners with third parties to implement carbon capture, storage, and utilization projects. This activity differentiates Occidental from most peers, which merely focus on curtailing their own emissions. Oxy’s experience sequestering carbon dioxide for enhanced oil recovery potentially enables it to go further. Management has ambitious plans to develop direct air capture facilities that should also generate incremental revenue. Finally, Oxy closed the roughly $12 billion CrownRock acquisition in 2024. This acquisition provides Oxy with a high-grade asset portfolio and allows Oxy to add significant production capacity in the Midland Basin. While this acquisition comes at an elevated capital cost, we think it will help create firmwide operating efficiencies. Joshua Aguilar, Morningstar director

Read more about Occidental Petroleum here.

HF Sinclair

Morningstar Price/Fair Value: 0.72

Morningstar Uncertainty Rating: Very High

Morningstar Economic Moat Rating: Narrow

Forward Dividend Yield: 5.46%

Industry: Oil & Gas Refining & Marketing

HF Sinclair is an integrated petroleum refiner that owns and operates seven refineries serving the Rockies, midcontinent, Southwest, and Pacific Northwest, with a total crude oil throughput capacity of 678,000 barrels per day. The firm earns a narrow economic moat rating, and the shares of its stock look 28% undervalued relative to our $51 fair value estimate.

After the acquisition of Sinclair Oil, HF Sinclair is a fully integrated independent company composed of refining, marketing, renewables, specialty lubricants, and midstream businesses. While the integrated portfolio arguably should improve its competitive position, poor refining performance has weighed on earnings and the share price. Its refining footprint has grown to seven refineries with a capacity of 678 mb/d, including the acquired Puget Sound refinery. This extends the company’s footprint beyond its historical midcontinent and Rockies roots to the West Coast. The West Coast market has higher costs and fewer competitive advantages, but given the region’s growing biofuel mandates, it could help with the growing renewable diesel business. Since the acquisitions, the refining segment has struggled with reliability and increasing operating costs. Management is working to rectify these issues and bring operating costs down to $7.25/bbl in the near term and $6.50/bbl long-term, but that level is still above higher-quality peers. Execution on this front is critical to improving overall firm profitability. By combining the two companies’ renewable diesel projects, HF can now produce 380 million gallons annually and expects future growth. However, startup issues initially plagued this segment, which is now struggling with weak margins and blending credit pricing. Adding Sinclair’s marketing group provides HF with a stable earnings stream, which it previously lacked as a merchant refiner. In addition, it offers the ability to generate RINs, whose high costs have put HF at a disadvantage in recent years. HF also now holds Sinclair’s midstream assets, which resulted in incremental EBITDA of $70 million-$80 million. This increased total midstream segment annual EBTIDA to about $450 million while opening future organic and external transaction growth opportunities. HF Sinclair’s lubricant business also diversifies from refining and is currently at a $350 million annual EBITDA run rate. While it was previously intended to serve as a platform for future growth, management has more recently suggested it could also be divested. Allen Good, Morningstar director

Read more about HF Sinclair here.

NOV

Morningstar Price/Fair Value: 0.72

Morningstar Uncertainty Rating: Very High

Morningstar Economic Moat Rating: None

Forward Dividend Yield: 4.15%

Industry: Oil & Gas Equipment & Services

NOV (formerly National Oilwell Varco) is a leading supplier of oil and gas drilling rig equipment and products, such as downhole tools, drill pipe, and well casing. NOV stock is trading at a 28% discount to our fair value estimate of $17 per share.

NOV is the fourth-largest diversified oilfield-services supplier after Schlumberger, Halliburton, and Baker Hughes. It competes with the Big Three in many end markets, but its significant presence in equipment manufacturing sets it apart. NOV is the largest original equipment manufacturer of rig systems for oilfield-services providers in onshore and offshore markets. It’s maintained majority market share for two decades, controlling over half the market. Numerous industry dynamics, including the 2015 oil price crash, reduced capital spending by exploration and production firms, and technological advancements by services providers have steadily reduced demand for new rig equipment, a trend we expect to persist. NOV has since diversified into more traditional oilfield-services markets as a result. NOV relies on strategic acquisitions to diversify its product portfolio, specifically through its Energy Products and Services segment, which account for the remaining sales. As a result, the firm now operates in more traditional oilfield-services markets, which are more fragmented and price-competitive. NOV must remain technologically evolved in a rapidly advancing space in order to stay relevant with contractors. It intends to continue strengthening its technological capabilities through further bolt-on acquisitions in lieu of in-house research and development. Given the highly competitive nature of the oilfield-services market, particularly onshore, we don’t expect future acquisition activity will generate significant value. High price competition requires NOV to maximize its operational efficiency in order to expand its profit margins. Since 2016, the firm has halved both its asset base and its fixed costs. Further operational rightsizing will improve margins over time, especially as NOV moves away from more capital-intensive rig manufacturing operations. Supply chain disruptions continue to fetter the firm’s access to key production inputs, but these have been easing lately. Joshua Aguilar, Morningstar director

Read more about NOV here.

BP

Morningstar Price/Fair Value: 0.76

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: None

Forward Dividend Yield: 6.59%

Industry: Oil & Gas Integrated

BP is an integrated oil and gas company that explores for, produces, and refines oil around the world. The stock is trading at a 24% discount to our fair value estimate of $38.60 per share.

BP still uses the phrase “integrated energy company,” but it doesn’t mean the same thing it did when it first introduced it. With their recent pivot, they are no longer leaning into the energy transition and investing heavily in low-carbon projects. Instead, after years of underperformance following the transition strategy’s introduction, management is cutting low-carbon investment and increasing investment in oil and gas. Investors should welcome this, but BP is still behind peers like Shell, which made the same decision a few years ago. With its latest plan, BP will spend $15 billion in 2025 and $13 billion-$15 billion in 2026 and 2027, compared with $14 billion-$18 billion annually previously. Within that overall reduction, the firm is increasing oil and gas spending by $1.5 billion annually to $10.5 billion and reducing low-carbon transition spending by about $5 billion from the previous plan to about $1.5 billion-$2 billion. BP will also reduce structural costs by $4 billion-$5 billion by 2027 and divest $20 billion worth of assets, including its Castrol business. The culmination of the plan should result in 20% compound annual growth in free cash flow through 2027 and the reduction of debt to $14 billion-$18 billion by year-end 2027, leaving BP in a stronger position. The improvement in financial metrics aside, the strategic shift should help stem underperformance in shares, but may not completely end it. The low-carbon strategy introduced in 2020, including a dividend cut, proved ill-timed and was premised on the end of hydrocarbons, which was clearly wrong. Oil and gas demand continue to grow even as low carbon energies take share, given the world’s growing energy needs. However, these low-carbon areas delivered poor returns and siphoned off capital that would otherwise be returned to shareholders or used to grow the oil and gas business. The strong oil and gas prices in the wake of the Russian invasion of Ukraine only exacerbated BP’s misstep. With the latest plan, they are now on the correct course, which should remove an overhang on shares, but does not necessarily make them a more compelling investment than their US or European peers. Allen Good, Morningstar director

Read more about BP here.

ExxonMobil

Morningstar Price/Fair Value: 0.77

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

Forward Dividend Yield: 3.83%

Industry: Oil & Gas Integrated

ExxonMobil is another integrated oil and gas company with a global presence. The firm earns a narrow economic moat rating, and the shares of its stock look 23% undervalued relative to our $135 fair value estimate.

Exxon is departing from industry trends by increasing spending to deliver $20 billion in earnings growth by 2030. Although the higher spending might sound alarming given the industry’s history of pursuing growth at the expense of returns, Exxon’s differentiated portfolio should enable it to do so while maintaining capital discipline and delivering returns. Its differentiated Guyana position and enlarged Permian position remain at the core of its portfolio, which offers capital-efficient volume and earnings growth. Meanwhile, the breadth of its downstream businesses opens new low-carbon business opportunities. Going beyond the headline of increased spending—$27 billion to $29 billion in 2025 and $28 billion to $33 billion annually from 2026 to 2030—reveals hydrocarbon investment will remain flat even as production grows from 4.3 mmboe/d in 2024 to 5.4 mmboe/d in 2030. This is thanks to over 70% of upstream investment going toward the Permian, Guyana, and LNG, where Exxon has realized material capital efficiency gains. These areas should also deliver margin expansion, adding $9 billion in earnings. Unlike some peers, Exxon will continue to grow Permian volumes from 1.5 mmboe/d in 2025 to 2.3 mmboe/d in 2030. Based on volume growth and cost reductions, another $8 billion of earnings growth will come from product solutions—refining, chemicals, and specialty products. By 2030, Exxon expects to deliver about $3 billion in earnings from new businesses in the production solutions and low-carbon segments, which span resins, low-emission fuels, carbon capture and storage, lithium, and low-carbon hydrogen. Spending on these lower emissions areas totals $30 billion through 2030 but requires policy support and market development. Thus, if the earnings don’t materialize, Exxon won’t invest. The large portion of short-cycle spending, including the Permian, affords Exxon flexibility in the event of lower prices. Even so, with the current plan, growing cash flow results in falling reinvestment rates to 2030 and a $30/bbl dividend breakeven. So, as the higher spending breaks with peers, the earnings and cash flow growth and delivery of higher returns justify it. Allen Good, Morningstar director

Read more about ExxonMobil here.

ConocoPhillips

Morningstar Price/Fair Value: 0.77

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

Forward Dividend Yield: 3.65%

Industry: Oil & Gas E&P

ConocoPhillips is a US-based independent exploration and production firm. ConocoPhillips is an affordable energy stock, trading at a 23% discount to our fair value estimate of $111 per share. The oil and gas exploration and production company earns a narrow economic moat rating.

Differentiating itself from peers big and small, ConocoPhillips has laid out a 10-year plan for restrained investment, steady growth, improving returns, and, importantly, returning cash to shareholders. Its strategy makes Conoco a compelling option in the energy sector, given its commitment to capital restraint and clear policy on return of cash to shareholders. Its low-cost portfolio gives it high-return investment options to grow in a rising price environment, while its strong financial position keeps the dividend safe in a downcycle. Central to its plan is a commitment to maintain capital spending at current levels while returning at least 30% of operating cash flow to shareholders through dividends and buybacks. Through high-grading and cost improvements, the company has reduced the oil price necessary to earn a 10% return on produced resources in its plan to under $40/barrel. Its growth plan rests largely on its unconventional assets, specifically its Permian position, which became the company’s largest position with the acquisition of Concho Resources and later grew with the purchase of Shell’s Permian shale assets. It has since steadily improved its operational performance. Permian resources constitute the bulk of the planned produced resources in the 10-year plan. While the company holds acreage in the Bakken and Eagle Ford, production will only be held flat during the next decade. Outside of the US unconventional portfolio, volumes will steadily grow during the next decade, with Alaska and Canada offsetting declines internationally. Growth in Canada will come from the Montney, where Conoco plans to leverage its unconventional experience. New volumes in Alaska will come from leveraging existing infrastructure to grow around legacy assets and later the recently approved Willow project. Liquefied natural gas volume growth will come from participation in two Qatar expansion projects while also sourcing volumes from Port Arthur LNG in the US. Allen Good, Morningstar director

Read more about ConocoPhillips here.

Devon Energy

Morningstar Price/Fair Value: 0.78

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Narrow

Forward Dividend Yield: 3.06%

Industry: Oil & Gas E&P

Devon Energy is an oil and gas producer with acreage in several top US shale plays. Trading 22% below our fair value estimate, Devon Energy has an economic moat rating of narrow. We think shares of this stock are worth $40 per share.

In 2018, Devon Energy embarked on a series of shrewd capital allocation moves that included selling its EnLink Midstream interest, divesting its Canadian heavy oil and Barnett Shale interests, and merging with WPX Energy. This allowed Devon to recycle cash by shedding interests that were either noncore or higher on the cost curve. Recycled cash allowed Devon to meaningfully pivot toward the Delaware and enjoy newfound exposure in the Bakken. Previously, Canadian heavy oil and the Barnett Shale made up 40%-50% of its production. Today, Devon is among the lowest-cost providers on the US shale cost curve, along with Diamondback Energy and EOG Resources. Devon’s reconstituted portfolio is buoyed by its presence in the Delaware, which has some of the lowest breakeven costs among US basins. About two thirds of the firm’s production is tied to this premier asset, which helps Devon command favorable well production relative to peers. We expect management to continue allocating capital here; it signaled that over 50% of its roughly $4 billion in capital expenditure will be allocated to the Delaware in 2025. But Devon is more than just a single-basin play. It has a meaningful presence in four of the top five US shale basins by lowest breakeven costs: the Williston, the Eagle Ford, and the Anadarko basins. Exposure to high-quality assets with a near 17-year remaining inventory life, coupled with operational improvements from initiatives like longer laterals, should allow Devon to enjoy modest production growth. Importantly, we expect production gains will come at increasingly attractive drilling and completion costs. We think Devon completed its reset with its revised capital allocation framework in late 2020. That framework was the first to implement a fixed plus variable dividend. In 2025, Devon’s capital allocation framework calls for returning 60% of its free cash to shareholders. Consequently, the board approved a 9% increase to Devon’s fixed dividend starting in the first quarter of 2025. Joshua Aguilar, Morningstar director

Read more about Devon Energy here.

Equinor

Morningstar Price/Fair Value: 0.80

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: None

Forward Dividend Yield: 6.09%

Industry: Oil & Gas Integrated

Oil and gas firm Equinor rounds out our list of best energy stocks to buy. Equinor is a Norway-based integrated oil and gas company. The stock is 20% undervalued relative to our fair value estimate of $30.50 per share.

Equinor is accelerating its push into renewable energy in pursuit of its 2050 net-zero goal. Central to its strategy is growth of its burgeoning renewable power business, primarily offshore wind. While net installed capacity only stands at 0.9 gigawatts at end-2023, Equinor plans to grow that to 12-16 GW by 2030. Capital will also go toward carbon transportation and storage, like its Northern Lights project, and clean hydrogen projects where Equinor plans to leverage its experience in each area to develop its pipeline of projects with the aim of becoming an industry leader. The strategy contrasts with many peers as it’s more focused and related to existing operations than peers, which are pushing into all varieties of renewable power generation or distribution and low-carbon businesses. Renewables, combined with its carbon capture projects, will see its share of gross capital investment grow from 20% in 2023 to over 50% by 2030. Despite the growing low-carbon investment, oil and gas will remain the cash flow and earnings driver for the foreseeable future. Equinor’s hydrocarbon strategy mimics peers as it is focused on investing in its highest-quality assets while divesting smaller, noncore areas. New projects coming on stream by 2030 break even at less than $35/barrel and payback in less than 1.5 years on average according to Equinor while delivering volume growth through 2026 of about 5%. The Norwegian Continental Shelf, where Equinor has a wealth of operating experience, remains central to the company’s strategy. Volumes are set to grow through 2026. Equinor also plans to further leverage existing infrastructure in the area to add future volumes at high returns. Meanwhile, the area figures into future decarbonization plans given the low carbon intensity of its production and opportunities for offshore wind, carbon storage and hydrogen projects. Internationally, Equinor is prioritizing free cash flow from its operations by focusing on key projects in fewer offshore areas such as the Gulf of Mexico, Canada, and Brazil, which should deliver 15% total volume growth from 2024 to 2030 at high returns. Allen Good, Morningstar director

Read more about Equinor here.

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Healthcare stocks appeal to investors for a few different reasons.

They are considered defensive, meaning they can hold up better than some other sectors during an economic slowdown.

Demand for health-related products and services continues to rise as populations age.

Healthcare companies tend to have high research and development spending, which can generate major improvements in treatment options.

In the year to date, the Morningstar US Healthcare Index rose 0.68%, while the Morningstar US Market Index lost 3.14%.

Year-to-Date Performance of Healthcare Stocks Source: Morningstar Direct. Data as of May 02, 2025.

To come up with our list of the best healthcare stocks to buy now, we screened for:

Healthcare stocks that are undervalued, as measured by our price/fair value metric.

Stocks that earn a wide Morningstar Economic Moat Rating. We think companies with wide economic moat ratings can fight off competitors for at least 20 years.

Stocks that earn a Low, Medium, High, or Very High Morningstar Uncertainty Rating, which captures the range of potential outcomes for a company’s fair value.

These were the most undervalued healthcare stocks that Morningstar’s analysts cover as of May 2, 2025.

Pfizer PFE Bio-Rad Laboratories BIO Philips PHG Thermo Fisher Scientific TMO GSK GSK West Pharmaceutical Services WST Zimmer Biomet Holdings ZBH Agilent Technologies A Danaher DHR Roche RHHBY Coloplast CLPBY Merck & Co. MRK

Here’s a little more about each of the best healthcare stocks to buy, including commentary from the Morningstar analysts who cover each company. All data is as of May 2, 2025.

Pfizer

Morningstar Price/Fair Value: 0.58

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Drug Manufacturers – General

Drug manufacturer Pfizer is the cheapest stock on our list of the best healthcare stocks to buy. Pfizer is one of the world’s largest pharmaceutical firms, with annual sales close to $50 billion (excluding covid-19-related product sales). The stock is trading 42% below our fair value estimate of $42 per share.

Pfizer’s foundation remains solid, based on strong cash flows generated from a basket of diverse drugs. The company’s large size confers significant competitive advantages in developing new drugs. This unmatched heft, combined with a broad portfolio of patent-protected drugs, has helped Pfizer build a wide economic moat around its business. Pfizer’s size establishes one of the largest economies of scale in the pharmaceutical industry. In a business where drug development needs a lot of shots on goal to be successful, Pfizer has the financial resources and the established research power to support the development of more new drugs. Also, after many years of struggling to bring out important new drugs, Pfizer is now launching several potential blockbusters in cancer and immunology. Pfizer’s vast financial resources support a leading salesforce. Pfizer’s commitment to postapproval studies provides its salespeople with an armamentarium of data for their marketing campaigns. Further, leading salesforces in emerging countries position the company to benefit from the dramatically increasing wealth in nations such as Brazil, India, and China. Pfizer’s 2020 move to divest its off-patent division Upjohn to create a new company (Viatris) in combination with Mylan should drive accelerating growth at the remaining innovative business. With limited patent losses and fewer older drugs, Pfizer is poised for steady growth (excluding the more volatile covid-19-related product sales) before a round of major patent losses hit in 2028. We believe Pfizer’s operations can withstand eventual generic competition; its diverse portfolio of drugs helps insulate the company from any one particular patent loss. Following the merger with Wyeth several years ago, Pfizer has a much stronger position in the vaccine industry with pneumococcal vaccine Prevnar. Vaccines tend to be more resistant to generic competition because of their manufacturing complexity and relatively lower prices. Karen Andersen, Morningstar director

Read more about Pfizer here.

Bio-Rad Laboratories

Morningstar Price/Fair Value: 0.59

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Wide

Industry: Medical Devices

Bio-Rad Laboratories, headquartered in Hercules, California, develops, manufactures, and sells products and solutions for the clinical diagnostics and life sciences markets. Bio-Rad Laboratories is an affordable healthcare stock, trading at a 41% discount to our fair value estimate of $400 per share. The medical-device company earns a wide economic moat rating.

Bio-Rad develops products and solutions for the life sciences research and clinical diagnostic markets and enjoys niche market leadership in diagnostic quality controls, antigens, and digital polymerase chain reaction molecular testing. Bio-Rad’s business relies on the razor-and-blade model typically seen in the diagnostic market, and consumable reagents account for about 70% of total sales, with these reagents often sold at a higher margin than their associated equipment and instruments. Bio-Rad’s strategy involves maintaining its current positioning in key markets such as blood typing and quality controls while capitalizing on strong demand for molecular diagnostics. It is also focused on improving operational efficiency, which has long lagged peers. In the longer term, Bio-Rad’s success will depend on whether the firm can successfully invest in research and development to maintain diagnostic specializations. We have a positive outlook for Bio-Rad, especially in clinical diagnostics, but the firm faces material competitive risks, particularly in molecular diagnostics, which is a competitive space. Bio-Rad began investing in Sartorius in the early 2000s and owns approximately 33% of the combined ordinary and preferred shares. After subtracting deferred taxes, this investment constitutes approximately 40%-50% of our fair value estimate. Sartorius is a bioprocessing and life sciences supplier that specializes in single use technology used in biologics manufacturing, a business with attractive long-term growth prospects that enjoys strong regulatory barriers to entry and razor-and-blade switching costs. Although Bio-Rad does not own a controlling stake, this investment is highly material to our model valuation and the company’s share price. The majority of Sartorius shares are held by a family trust that expires in 2028. We expect no significant changes to Bio-Rad’s holding for at least the next few years. Jay Lee, Morningstar senior analyst

Read more about Bio-Rad Laboratories here.

Philips

Morningstar Price/Fair Value: 0.66

Morningstar Uncertainty Rating: High

Morningstar Economic Moat Rating: Wide

Industry: Medical Devices

Next on our list of the best healthcare stocks to buy is Philips. Koninklijke Philips is a diversified global healthcare company operating in three segments: diagnosis and treatment, connected care, and personal health. The stock is trading at a 34% discount to our fair value estimate of $39 per share.

Philips is one of the leaders in imaging and image-guided therapies. But the company’s track record is checkered, with multiple self-induced missteps tarnishing its reputation and investor confidence. We believe the resolution of sleep care problems, focus on its high-performing areas, and new management team should be able change the narrative, but uncertainty remains. Philips’ diagnosis and treatment segment, composed of imaging, ultrasound, and image-guided therapy lines, is a member of the Big Three, along with Healthineers and GE Healthcare. Philips lacks the scale and footprint of its larger peers in diagnostic imaging but has strong presence across other modalities and the product portfolio breadth that allows it to compete effectively. In imaging areas, such as cardiovascular IGT, cardiac ultrasound, and monitoring, Philips is the industry leader and should capitalize on many favorable trends in the industry. We expect global demand for imaging equipment and services to grow in midsingle digits over the next decade, driven by the demographic shifts, expanding healthcare access, and penetration of new customer channels. All three main industry participants stand to benefit from total addressable market growth and also greater share at the expense of smaller and more niche providers. However, Philips’ performance has been problematic for a number of years, punctuated by the massive and prolonged struggles in sleep care. Litigation resolution in 2024 is the important step in rebuilding sleep care, but the pathway and the ability for Philips to claw back its market position remains highly uncertain. Emphasis on profitability is key. The company’s operating margins have been decimated by the sleep care issues but also by significant component sourcing challenges and margin compression in imaging. Currently, Philips materially lags its imaging peers on profitability, and we don’t expect this gap to close soon. However, we do believe that the margins have bottomed and should improve. But Philips has a long way to go to restore investor trust. Alex Morozov, Morningstar director

Read more about Philips here.

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Thermo Fisher Scientific

Morningstar Price/Fair Value: 0.67

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Diagnostics & Research

Thermo Fisher Scientific sells scientific instruments and laboratory equipment, diagnostics consumables, and life science reagents. Thermo Fisher Scientific is an affordable healthcare stock, trading at a 33% discount to our fair value estimate of $630 per share. The diagnostics and research firm earns a wide economic moat rating.

Thermo Fisher is weathering the pullback in global biopharmaceutical spending and China softness better than most of its peers. Being the premier life science supplier and having an unmatched portfolio of products, resources, and manufacturing capabilities have allowed the firm to retain and grow its wallet share among its customers across all channels. We expect the current budget-constrained environment to slowly ease in the upcoming year. Thermo Fisher remains in a great position to leverage its share gains in the biopharma channel and capitalize on strong long-term demand. While bigger is not always better, Thermo Fisher had long committed itself to accumulate as robust a product offering, under one roof, as possible. To reach its ultimate goal of being a one-stop shop go-to provider of life science instruments and consumables, the company has spent aggressively throughout the years on internal efforts but particularly on acquisitions. More than $50 billion has been deployed since 2010 on this strategy (including the recent PPD acquisition), which, while accretive to the company’s reach, scale and product breadth, has historically suppressed its returns on invested capital to rather modest levels. Not anymore. While the uplift from covid-19 tests and vaccines has been significant, the swiftness and extent of the company’s response has cemented Thermo Fisher’s integral role within the segment. The company has long found a receptive audience to its pitch with large pharma clients, which see sizable benefits in the simplified procurement process Thermo Fisher offers. Accelerated by the pandemic, the critical supplier status has been extended to the firm by a much wider audience, including governments. We anticipate the firm’s penetration of all its customer channels to grow, aided by its expansion into contract research and manufacturing. We also think the company’s global reach will continue to resonate and its already strong presence within rapidly growing emerging markets to expand further. Alex Morozov, Morningstar director

Read more about Thermo Fisher Scientific here.

GSK

Morningstar Price/Fair Value: 0.67

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Drug Manufacturers – General

In the pharmaceutical industry, GSK ranks as one of the largest firms by total sales. The firm earns a wide economic moat rating, and the shares of its stock look 33% undervalued relative to our $58 fair value estimate.

As one of the largest pharmaceutical and vaccine companies, GSK has used its vast resources to create the next generation of healthcare treatments. The company’s innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion. The magnitude of GSK’s reach is evidenced by a product portfolio that spans several therapeutic classes. The diverse platform insulates the company from problems with any single product. Additionally, the company has developed next-generation drugs in respiratory and HIV areas that should help mitigate both branded and generic competition. We expect GSK to be a major competitor in respiratory, HIV, and vaccines over the next decade. On the pipeline front, GSK has shifted from its historical strategy of targeting slight enhancements toward true innovation. Also, it is focusing more on oncology and immunology, with genetic data to help develop the next generation of drugs. The benefits of these strategies are showing up in GSK’s early-stage drugs. We expect this focus will improve approval rates and pricing power. In contrast to respiratory drugs, treatments for cancer indications carry much stronger pricing power with payers. We think GSK’s decision to divest the consumer business is likely to unlock value over the long run. GSK divested Haleon, its consumer group, in July 2022. Given the strong valuations of consumer healthcare companies, we expect this unit will yield a stronger valuation than what was implied within the company’s structure before the divestment. Jay Lee, Morningstar senior analyst

Read more about GSK here.

West Pharmaceutical Services

Morningstar Price/Fair Value: 0.68

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Medical Instruments & Supplies

West Pharmaceutical Services is based in Pennsylvania and is a key supplier to firms in the pharmaceutical, biotechnology, and generic drug industries. Trading 32% below our fair value estimate, West Pharmaceutical Services has an economic moat rating of wide. We think shares of this stock are worth $310 per share.

West Pharmaceutical Services is the global market leader in primary packaging and delivery components for injectable therapeutics. Primary packaging has direct contact with the drug product and must be manufactured to ensure stability, purity, and sterility of the drug product in accordance with strict regulatory standards. Because of the mission-critical nature of these components, it is important for customers to trust the quality of manufacturing and design. Key product lines include elastomer components such as stoppers, seals, and plungers, Daikyo Crystal Zenith vials made out of polymer instead of glass, and auto-injectors. Injectables includes not only older modalities like small molecule drugs, insulin, and vaccines but also biologics and GLP-1 obesity drugs. West has roughly 70% market share of elastomer components for injectable drugs, with the remaining 30% split between Switzerland’s Datwyler and narrow-moat AptarGroup. Additionally, its polymer vials are important containment solutions for biologics, a significant part of the injectables market, because protein therapeutics are incompatible with glass. West’s strong market share is backed by its reputation for quality and supply chain expertise and reinforced by the high cost of failure for injectable drug packaging, especially biologics. The firm’s scale and diversified supply chain are unparalleled. We believe West will be able to maintain strong market share in the injectables components market. The main driver of the company’s long-term revenue outlook is the growth of the injectables market, which enjoys secular growth trends due to increasing use of biologics. GLP-1 drugs are also a potential source of upside. Additionally, we think the company will continue to benefit from stricter regulations requiring higher-quality, lower particulate packaging, which is an incentive for customers to upgrade from standard primary components to West’s high value products, or HVP. We think this mix shift toward higher-margin products will gradually improve the firm’s profit margins, although high customer concentration adds uncertainty to our outlook. Jay Lee, Morningstar senior analyst

Read more about West Pharmaceutical Services here.

Zimmer Biomet Holdings

Morningstar Price/Fair Value: 0.68

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Medical Devices

Zimmer Biomet designs, manufactures, and markets orthopedic reconstructive implants as well as supplies and surgical equipment for orthopedic surgery. Zimmer Biomet Holdings is an affordable healthcare stock, trading at a 32% discount to our fair value estimate of $150 per share. The medical-device company earns a wide economic moat rating.

Zimmer Biomet is the undisputed king of large-joint reconstruction, and we expect aging baby boomers and improving technology suitable for younger patients to fuel solid demand for large-joint replacement that should offset price declines. Zimmer stumbled into a series of pitfalls in 2016-17, including integration issues, supply and inventory challenges, and quality concerns. The firm’s efforts to turn itself around have been admirable, though the pandemic slowed progress. Now Zimmer is seeking to capitalize on the normalization of procedure volume and placements of its Rosa robot. Zimmer’s strategy is two-pronged. First, it is focused on cultivating close relationships with orthopedic surgeons who make the brand choice. High switching costs and high-touch service keep the surgeons closely tied to their primary vendor. This close relationship and vendor loyalty also help explain why market share shifts in orthopedic implants are glacial, at best. As long as Zimmer can launch comparable technology within a few years of its rivals, it can remain in a strong competitive position. Nevertheless, we think surgeon influence will inevitably erode, as the practice of medicine changes in response to healthcare reform. Over the long term, it will be more difficult for surgeons to run private practices profitably, and more of them will be open to employment at hospitals. Second, the firm aims to accelerate growth through innovative products and improved execution. The latter is critical, in our view, to realizing the firm’s potential. Despite a range of structural competitive advantages, Zimmer Biomet in 2016-18 failed to shine in operations, which dragged down returns. Former CEO Bryan Hanson delivered substantial signs of progress. Now, new CEO Ivan Tornos must continue progess on Rosa robot placements (especially in outpatient settings), related consumable product pull-through, and expansion of the firm’s digital portfolio. Additionally, we anticipate the firm will flex its advantage in key areas, including extremities, trauma, and collaborations that involve sensor and digital technologies to improve surgical workflow. Debbie S. Wang, Morningstar senior analyst

Read more about Zimmer Biomet Holdings here.

Agilent Technologies

Morningstar Price/Fair Value: 0.72

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Diagnostics & Research

Originally spun out of Hewlett-Packard in 1999, Agilent has evolved into a leading life science and diagnostic firm. Trading 28% below our fair value estimate, Agilent Technologies has an economic moat rating of wide. We think shares of this stock are worth $151 per share.

Agilent focuses on providing tools to analyze the structural properties of various chemicals, molecules, and cells. The company is one of the leading providers of chromatography and mass spectrometry tools, which have applications in a variety of end markets, including the healthcare, chemical, food, and environmental fields. While healthcare-related applications, including clinical diagnostics, remain Agilent’s largest end market, Agilent generates about half of its sales from nonhealthcare fields. Agilent’s strategy revolves around placing analytical instruments and informatics with relevant customers and then providing related services and consumables such as chromatography columns and sample preparation tools, which account for the rest of Agilent’s sales. About half of Agilent’s sales recur naturally. However, even instrument sales can be relatively sticky at the end of the instrument’s life cycle, especially in the highly regulated biopharmaceutical end market (over 35% of Agilent’s sales) and some of its other applications where intensive, time-consuming training is required to master the scientific analysis. Agilent aims to increase its exposure to these sticky customer relationships. Overall, we think top-tier positions in most end markets, innovation, marketing operations, and ongoing cost controls should help Agilent grow revenue in the midsingle digits compounded annually and boost margins overall during our five-year forecast period. Overall, we expect mid- to high-single-digit earnings growth from Agilent, organically and with some share repurchases. While internal growth opportunities look solid, acquisitions could add to its bottom-line growth prospects, as well. Julie Utterback, Morningstar senior analyst

Read more about Agilent Technologies here.

Danaher

Morningstar Price/Fair Value: 0.74

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Diagnostics & Research

In 1984, Danaher’s founders transformed a real estate organization into an industrial-focused manufacturing company. Danaher is an affordable healthcare stock, trading at a 26% discount to our fair value estimate of $270 per share. The diagnostics and research firm earns a wide economic moat rating.

Through its Danaher Business System, Danaher aims for continuous improvement of its scientific technology portfolio by seeking out attractive markets and then making acquisitions to enter or expand within those fields and also divesting assets that are no longer seen as core, such as the recently divested Veralto operations. After acquisitions, Danaher aims to accelerate core growth at acquired companies by making research and development and marketing-related investments. It also implements lean manufacturing principles and administrative cost controls to boost operating margins. Overall, we appreciate Danaher’s strategic moves, which have pushed it into attractive end markets with strong growth prospects and sticky, recurring revenue streams. The company’s acquisition-focused strategy has contributed to it becoming a top-five player in the highly fragmented and relatively sticky life science and diagnostic tool markets about 20 years after its first acquisition in the space (Radiometer in 2004). Recent life science and diagnostic acquisitions have included Beckman Coulter, Pall, and Cepheid. In early 2020, Danaher completed the acquisition of GE Biopharma, now called Cytiva, which fills in some gaps for Danaher within the biopharmaceutical development and manufacturing tool market. We find that life science end market particularly attractive given its strong growth trajectory, high margins, and high switching costs associated with regulatory and reproducibility concerns of end users. Management has started making more acquisitions in that space, such as Aldevron, and we would expect more tuck-in acquisitions in this and other end markets. Danaher also continues to prune its portfolio of businesses. The recent divestiture of its environmental and applied solutions group (now called Veralto) is just the latest for the company that distributed shares in the now publicly traded Fortive Corp (industrials) in 2016 and Envista (dental) in 2019 directly to shareholders. More divestitures are possible in the future, as well. Julie Utterback, Morningstar senior analyst

Read more about Danaher here.

Roche

Morningstar Price/Fair Value: 0.75

Morningstar Uncertainty Rating: Low

Morningstar Economic Moat Rating: Wide

Industry: Drug Manufacturers – General

Roche is a Swiss biopharmaceutical and diagnostic company. The firm earns a wide economic moat rating, and the shares of its stock look 25% undervalued relative to our $55 fair value estimate.

We think Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global healthcare into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic expertise. Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition. In addition, with the launch of Perjeta in 2012, Kadcyla in 2013, and Phesgo (a subcutaneous coformulation of Herceptin and Perjeta) in 2020, Roche has somewhat refreshed its breast cancer franchise. Gazyva, approved in CLL and NHL and in testing in lupus, as well as new bispecific antibodies Columvi and Lunsumio will also extend the longevity of the Rituxan blood cancer franchise. Roche’s immuno-oncology drug Tecentriq launched in 2016, and we see peak sales potential above $5 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales). More recent deals have brought rights to promising development programs in immunology (Televant’s TL1A) and cardiometabolic (Carmot’s diabetes and obesity programs). Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho. Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment. Karen Andersen, Morningstar director

Read more about Roche here.

Coloplast

Morningstar Price/Fair Value: 0.75

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Medical Instruments & Supplies

Coloplast is a leading global competitor in ostomy management and continence care. The firm earns a wide economic moat rating, and the shares of its stock look 25% undervalued relative to our $14.10 fair value estimate.

Based in Denmark, Coloplast is a leader in global ostomy and continence care. The firm has made inroads into the concentrated urology and fragmented woundcare markets, but it remains a peripheral player there. In contrast, Coloplast has a long record of consistent and meaningful innovation in ostomy and continence care that has led to a dominant position in Europe and growth in the US. Since 2008, the firm has done an admirable job of trimming its cost structure as it focused on profitable growth. After shifting the majority of its production to Hungary, China, and Costa Rica, Coloplast now enjoys a gross margin that beats that of rival Convatec by more than 1,500 basis points. Currently, Coloplast is altering its emphasis to enhance growth by entering new geographies, with an emphasis on the United States. We’ve long been impressed with the firm’s ability to provide thoughtful, user-friendly improvements to its ostomy and intermittent catheters, which have won over end users. Most recently, Coloplast has upped its game with the incorporation of more sophisticated technology in its supplies and corresponding investment in clinical studies to demonstrate the value of these improvements. For example, new intermittent catheter Luja empties the bladder more fully to reduce the risk of urinary tract infections. We are less keen on Coloplast’s woundcare segment, where competitive product launches abound. Coloplast’s woundcare portfolio had historically centered on low-tech foam, leaving the firm more vulnerable as advanced woundcare has moved toward hydrofiber and antibacterial products. Further, as with all competitors in this market, Coloplast faces relatively low switching costs for customers. Additionally, the majority of woundcare products are sold to providers (versus directly to patients themselves), which means there is greater pricing pressure from group purchasing organizations and government-sponsored tenders. However, Coloplast’s acquisition of Kerecis puts the firm in a strong position to compete in the fast-growing biologic wound care niche with its unique fish skin therapies. Debbie S. Wang, Morningstar senior analyst

Read more about Coloplast here.

Merck & Co.

Morningstar Price/Fair Value: 0.75

Morningstar Uncertainty Rating: Medium

Morningstar Economic Moat Rating: Wide

Industry: Drug Manufacturers – General

Drug manufacturer Merck & Co. rounds out our list of best healthcare stocks to buy. Merck makes pharmaceutical products to treat several conditions in a number of therapeutic areas, including cardiometabolic disease, cancer, and infections. The stock is 25% undervalued relative to our fair value estimate of $111 per share.

Merck’s combination of a wide lineup of high-margin drugs and a pipeline of new drugs should ensure strong returns on invested capital over the long term. Further, following the divestment of the Organon business in June 2021, the remaining portfolio at Merck holds a higher percentage of drugs with strong patent protection. On the pipeline front, after several years of only moderate research and development productivity, Merck’s drug development strategy is yielding important new drugs. Merck’s new products have mitigated the generic competition, offsetting the recent major patent losses. In particular, Keytruda for cancer represents a key blockbuster with multi-billion-dollar potential: It holds a first-mover advantage in one of the largest cancer indications of non-small cell lung cancer with excellent clinical data. Also, we expect new cancer drug combinations will further propel Merck’s overall drug sales. However, we expect intense competition in the cancer market, with several competitive drugs likely to report important clinical data over the next couple of years in earlier stage cancer settings. Other headwinds include generic competition, notably to diabetes drug Januvia, but potentially not until 2026 in the US. After several years of mixed results, Merck’s R&D productivity is improving as the company shifts more toward areas of unmet medical need. Owing to side effects or lack of compelling efficacy, Merck experienced major setbacks several years ago with cardiovascular disease drugs anacetrapib, Tredaptive, Rolofylline, and TRA along with telcagepant for migraines. Safety questions ended the development of osteoporosis drug odanacatib. Despite these setbacks, Merck has some solid successes, including a successful launch for its PD-1 drug Keytruda in oncology. Following on this success, Merck is shifting its focus toward areas of unmet medical need in specialty-care areas, and Keytruda is leading this new direction. We expect Keytruda’s leadership in non-small cell lung cancer and several other cancers will be a key driver of growth for the firm over the next several years, but the 2028 US patent loss on the drug will create eventual pressure.

Read more about Merck & Co. here.

How to Find More of the Best Healthcare Stocks to Buy

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