When investors talk about value stocks, they are usually speaking of companies with cheap shares. But a comment from Warren Buffett may be a better guide when seeking out value. He said it is better to buy a wonderful business at a fair price than a fair company at a wonderful price. That's because great businesses continue rewarding owners over time. Buying cheap shares often only provide a short-term jump back to their fair value.

Vertex Pharmaceuticals (VRTX 1.33%), Align Technology (ALGN -2.11%), and ResMed (RMD -11.48%) each have a great track record and financial performance that easily justifies its current valuation. Breaking down the numbers, they could be the best value stocks in the healthcare sector right now.

A man and a woman in an industrial office looking at a laptop computer screen.

Image source: Getty Images.

1. Vertex Pharmaceuticals

Sixty years ago, the average life expectancy of someone born with cystic fibrosis (CF) -- a progressive, genetic disease associated with thick mucous building up in organs -- was 10 years. Today, a child diagnosed with CF can expect to live into their fifties. The drugs developed by Vertex are a significant contributor to that increased longevity. The company's goal is to one day cure the disease.

Vertex has clinical programs in seven different disease areas using small molecule drugs, gene editing, and cell therapy. Outside of CF, the farthest along are in phase 2 clinical trials. The company is partnered with gene-editing pioneer CRISPR Therapeutics (CRSP 3.02%) on sickle cell disease and beta thalassemia. It also has drugs for lung and liver disease, as well as one for kidney disease, in phase 2 trials expected to wrap up this year. Its cell therapy treatment for diabetes recently received a breakthrough designation from the U.S. Food and Drug Administration (FDA) but isn't expected to conclude its full trial until 2028.

Vertex has compounded sales 16% per year over the past decade, and is estimating $6.7 billion to $6.9 billion in revenue this year, which would amount to 10% growth. It produced $10.29 in earnings per share (EPS) last year, giving it a price-to-earnings (P/E) ratio of 21. That's about half of the average ratio for both pharmaceutical stocks and the S&P 500. For a company that hasn't grown slower than 22.5% in the past five years and has a successful history of treating rare diseases, any discount is an opportunity. Being half as expensive as the overall market could make Vertex one of the best value stocks to buy right now.

2. Align Technology

Align is known for its Invisalign clear teeth straighteners. But company has become much more than just a consumer product for those looking to straighten their teeth. Through hardware and software, the company has become a partner with orthodontists, helping them grow their business and improve the experience of their patients. The numbers tell the story.

Utilization by North American orthodontists -- measured as the number of cases shipped divided by the number of doctors to whom cases were shipped -- has dramatically risen in the past few years. This is indicative of both higher sales of aligners and increased productivity for orthodontists. It's a win-win situation that makes it hard for competitors to gain a foothold.
















Data source: Align Technology.

Management believes the opportunity for continued growth is immense. They cite 500 million people that could benefit from teeth straightening. With only 15 million starting treatment each year, growth could continue for decades.

Although the pandemic dented sales last year, Align grew revenue and profits from 2011 to 2019 by 22% and 24%, respectively. The company hasn't offered guidance for 2021, but committed to the long-term growth projection of 20% to 30%. If the fourth quarter is any indication, Align will have no problem delivering on the commitment. In the quarter ending Dec. 31, revenue came in 28% higher than the year ago period. If that holds up for this year, the stock will trade for about 15-times 2021 sales. That may not be cheap, but for a high quality company growing into an enormous addressable market, it could be the fair price for a wonderful business that investors should be willing to pay.

3. ResMed

Over the last few years, there has been a steady stream of research showing just how critical sleep is to our health. ResMed makes the continuous positive airway pressure (CPAP) devices and software that help patients address breathing problems during sleep. They are also necessary for patients with Chronic Obstructive Pulmonary Disease (COPD), another condition that results in difficulty breathing. As incentives in healthcare shift toward addressing underlying causes of problems rather than just symptoms, the company is well-positioned.

Roughly one in four adults in the U.S. have sleep apnea, yet 80% of them are undiagnosed, and it is often a comorbidity for patients with chronic conditions. That means healthcare providers and insurers have plenty of incentive to treat sleep apnea, because it is necessary to reduce the severity and cost of the primary disease.  

A recent 30-year study from the U.K. showed patients who were not longtime users of the breathing devices were five times more likely to die. There was even a direct relationship between using the devices and avoiding trips to the hospital. Those numbers highlight the importance of dealing with the condition, and make a strong case for the company with 32% market share for CPAP machines. 

Surprisingly, the stock is reasonably priced. Over the past few years, the stock has traded between 30 and 50 times cash flow from operations. That number currently stands at about 34. ResMed has grown revenue consistently above 10% over the past decade and EPS above 13%. It should be able to accelerate profits as its cloud software becomes a larger part of the business and it leverages the medical data from 8 billion nights of sleep and 13.5 million cloud-connectable devices. For investors trying to sleep well despite the stock market at record levels, ResMed could be just what the doctor ordered.