The U.S. healthcare sector has significantly lagged the broader market over the past decade, and one value investor says that slump is now creating compelling opportunities. Years of pressure on managed-care margins and a cyclical slowdown in clinical research have left several companies trading below their long-term earnings potential.
BNN Bloomberg spoke with Alex Fitch, partner, portfolio manager and director of U.S. research at Harris Associates, who outlined where he sees mispriced value emerging and why he believes the sector is positioned for recovery.
Key Takeaways
- A decade of underperformance has pushed several U.S. healthcare subsectors, especially managed care and clinical research, into value territory.
- Policy shifts and rising healthcare costs have pressured margins, leaving many insurers losing money in Medicaid and exchange markets.
- Centene and Molina are expected to benefit as pricing resets and competitors exit unprofitable segments, improving mid-cycle earnings potential.
- Molina’s strong management and efficiency provide margin of safety, allowing it to remain profitable even in the sector’s downturn.
- IQVIA and other CROs appear early in a cyclical recovery as biopharma R&D spending normalizes after pandemic distortions.
Read the full transcript below:
ANDREW: Time for Hot Picks. Our guest says that over the past decade he has had very few holdings in healthcare, with many names trading at elevated prices. But more recently, he says the sector has underperformed the S&P 500, creating lots of opportunities. We’re joined now by Alex Fitch, partner, portfolio manager and director of U.S. research at Harris Associates. Thanks very much indeed for joining us. Let’s get into your ideas, if that’s okay. First off, Centene — that’s CNC in New York. What do they do and what attracts you to this stock? Do we have Alex? Okay. Go ahead, Alex — thanks for joining us, and sorry about the glitch there. Tell us what Centene does and what draws you to the stock.
ALEX: Well, just to start off quickly, at Harris and Oakmark, we’re long-term value investors. As you mentioned, we haven’t had many holdings in healthcare for a long period because valuations were reasonably high and we found better opportunities elsewhere. That has been changing in recent years, especially in the highly out-of-favour parts of the healthcare market, like managed care. Managed care has been very challenged for the last two years and has really been hammered by two things. One, we’ve had policy shifts that have made for an adverse mix impact. Second, we’ve seen a very sharp acceleration in the cost trend in healthcare. The combination means that in many cases today, premiums just aren’t adequate to reimburse companies for the costs they’re taking on. That is especially true in Medicaid and the exchange business, and Centene is really in the centre of that storm.
This is a company that’s one of the largest players in Medicaid and one of the largest players in exchanges. Predictably, they’ve had sizable earnings headwinds in recent years. You’ve seen their EPS fall from something like US$7 a share in 2023 and 2024 to around US$2 per share this year, and the stock has followed suit. The beautiful thing to us about managed care is that this is short-cycle insurance. It’s not property and casualty insurance, where if you write a bad policy, you’re on the hook for two decades. This is a business that reprices annually. Historically speaking, if I can slightly alter the old phrase, the thing that fixes low margins is low margins.
That’s what we saw in 2015 when the exchanges were relatively new. We had too much capacity come in, but just two years later we were back at peak margin levels. We saw that in 2020 as well. Today, I think we have all the precursors of a market recovery coming into place. All of the companies in the public market that operate in the exchange business are losing money in that line today. CVS is saying it will exit the market. In Medicaid, the public filings show that on average the industry is losing money and states are getting more generous on updates. Our opportunity is that investors are hyper-focused on whether the recovery will be three quarters from now or six quarters from now. We don’t really care when it happens, as long as we’re being adequately compensated to wait. This is a US$39 stock where, in a few years, we can see them back at US$7 of earnings power. Five-and-a-half times earnings feels like adequate compensation.
ANDREW: We’re tight for time. Molina Healthcare — what draws you to this one?
ALEX: Molina is a similar story to Centene — in the heart of the mess today with Medicaid and exchange exposure — but with two wrinkles. First, I would say it’s the best-managed company in the industry. Second, it’s the most efficient operator. In a world where the average Medicaid company has a negative one per cent profit margin, Molina is still making a positive two per cent profit margin. If we get back to the industry earning its cost of capital, Molina’s earnings need to more than double.
The other thing those two wrinkles provide is a margin of safety. Their efficiency means this company is still earning US$13 a share this year. This is a US$145 stock, so we’re paying 11 times trough earnings today. Like Centene, we think normal mid-cycle earnings are dramatically higher. And once again, when you adjust for the market recovery we believe is likely, we’re paying a mid-single-digit multiple of EPS.
ANDREW: Okay, so another health insurer or managed-care name. And then finally, a very different company. I always forget how to pronounce it — is it IQVIA? They’re a health-data provider?
ALEX: IQVIA is a bit of a different animal than the health insurers. It’s a clinical research organization, so what they do is clinical trials on behalf of pharmaceutical companies. The easy way to think about the business model is that this is a growing royalty on pharmaceutical R&D spending. That used to be a prized model — they grew at high single digits and earned high returns on capital.
Over the last three years, though, the stock has meaningfully underperformed the S&P 500, and the culprit is growth. COVID drove a boom in R&D spending and a lot of work was pulled forward. IQVIA and its peers had their revenues overly inflated, and we’ve been through three years of weak or even negative organic growth for the group. Our view is firmly that this has been cyclical, not secular, and we’re starting to see the tide turn. Biopharma companies are getting back to spending and IQVIA’s growth is accelerating.
In many ways, it is what we think managed care could be 12 to 18 months from now — where investors are becoming convinced the bottom is in and we’re set to accelerate from here. Stocks like IQV are up 50 per cent off their lows, but we still think we’re in the early stages of this recovery. There’s a lot of growth in pharmaceutical R&D ahead of us. When we get back to high-single-digit growth for clinical research organizations, we suspect they won’t trade at the 20 to 30 per cent discount to where they used to.
ANDREW: Alex, thanks very much — really appreciate it.
ALEX: Thank you for having me.
ANDREW: Alex Fitch, partner, portfolio manager and director of U.S. research at Harris Associates.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| CNC NYSE | N | N | Y |
| MOH NYSE | N | N | Y |
| IQV NYSE | N | N | Y |
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This BNN Bloomberg summary and transcript of the Nov. 26, 2025 interview with Alex Fitch are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.