Up 5% this week: Is the ResMed shares sell-off over and done with?

The ResMed share price has fallen by more than 30% since 1 June.

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ResMed Inc (ASX: RMD) shares have risen 5.26% since Friday's close and are currently trading for $22.62 apiece.

This prompts us to ask whether one of the fastest ASX 200 blue-chip sell-offs of 2023 is now over.

Let's canvas the views of a few experts.

But first, a quick recap.

Are ResMed shares rebounding?

ResMed is the fourth biggest ASX 200 healthcare share with a market capitalisation of $32 billion.

ResMed shares began their recent tumble at the beginning of August. The whole healthcare sector was already falling at that point. A broader sell-off in ASX healthcare stocks commenced in June.

However, ResMed shares also began weakening due to investors' concerns over GLP-1 drugs.

The ASX 200 healthcare darling fell from $33.85 on 3 August to a four-year low of $21.14 on 13 October.

Since then, ResMed shares have rebounded.

So, is the sell-off over and done with?

Is the sell-off over?

Considering the 5%-plus gain since Friday's close, we wonder if shareholders and other investors have drawn comfort from the company's 1Q FY24 results, which were released on Friday.

As my Fool colleague James reported, ResMed revealed a 16% lift in revenue to US$1.1 billion in 1Q FY24 compared to 1Q FY23. However, it also reported a 250-basis-point contraction in the gross margin to 54.4%.

ResMed also declared a quarterly cash dividend of 4.8 US cents per share, which is the second highest on record.

Perhaps investors were also pacified by the ResMed CEO's frank discussion with analysts last Friday about the impact that weight loss medications like Ozempic may have on future demand for sleep apnea devices.

You see, obesity is a common precursor to sleep apnea. So, if Ozempic and other GLP-1 medicines like Mounjaro (now available in Australia) can lower rates of obesity, will that lower revenue for ResMed too?

The CEO answered many of the questions on investors' minds and even quantified how many potential customers in the total addressable sleep apnea market ResMed may lose due to the success of GLP-1s.

What do the experts think?

Goldman Sachs is among several market analysts who think the ResMed shares sell-off has been too big.

After ResMed's quarterly update, Goldman Sachs retained its buy rating with a 12-month share price target of $32.

The broker commented:

[W]e believe the perceived downside risk from GLP-1/GIPs has been over-capitalised at RMD's current valuation.

In The Australian today, Goldman Sachs says the whole ASX 200 healthcare sector is looking attractive following a five-month decline.

For the record, the S&P/ASX 200 Health Care Index (ASX: XHJ) has fallen by more than 20% since 1 June.

The broker reckons the recent sector decline is one of the sharpest deratings in two decades.

It has been caused by an "overdone" rise in bond yields, concern around GLP-1s, and lower FY23 consensus earnings forecasts.

The broker says the decline is now providing "one of the better entry points into the sector in a long time".

Analysts Matt Ross and Tony Wu say the healthcare sector now has a 12-month forward price-to-earnings (P/E) multiple of 24 times – the lowest premium to the market in a decade.

They note that the premium to global healthcare stocks is still elevated but has more than halved to 49% over two years. The premium is now running below the long-run average of 59%.

What did Goldman Sachs say?

Ross and Wu wrote:

In a market where quality Defensive/Growth stocks are still expensive in historical terms, healthcare is now the only sector in that bracket that is trading near its long-run average valuation.

Having recently highlighted the tactical case for adding to Defensive exposures into year-end, we believe the recent sell-off in Healthcare stocks is providing one of the better entry points into the sector in a long time.

The broker said the ASX healthcare stocks offering the best 'price for growth' today include ResMed shares, Clinuvel Pharmaceuticals Limited (ASX: CUV) shares, and CSL Limited (ASX: CSL) shares.

Since 1 June, ResMed shares have fallen 31%. The CSL share price has fallen 25% to $233.80. The Clinuvel share price has fallen 19% to $14.72.

Citi also says ResMed shares have been "oversold" and currently offer huge upside.

Michael Gable from Fairmont Equities agrees that the ResMed share price decline has been "overdone".

On The Bull, Gable called ResMed shares a hold and commented:

Recent investor concerns that weight loss drugs and diabetes medicines may have a major negative impact on ResMed's sleep apnoea products business appear overdone, in our opinion.

After analysing the recent price action, it appears buyers are taking advantage of a discounted share price as the stock seems to have finally found a low. We expect RMD to recover from here.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bronwyn Allen has positions in CSL. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Goldman Sachs Group, and ResMed. The Motley Fool Australia has positions in and has recommended ResMed. The Motley Fool Australia has recommended CSL. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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