(Bloomberg) -- Out of favor health-care technology stocks may be nearing a bottom.

The selloff in technology firms amid geopolitical turmoil and rising interest rates spilled over into health-care peers, sending the Global X Telemedicine & Digital Health ETF to a record low early last week. Since then, though, the ETF has staged a sharp turnaround, rallying 14%. 

“Weeks like last week suggest a bottom may be forming,” says Glen Santangelo, analyst at Jefferies Group. He noted a 55% discount to the broader tech sector -- versus 32% before the pandemic -- could mean there’s some hope for the heathcare counterpart. 

He expects that stocks focused on turning a profit over growth -- like revenue-cycle vendor R1 RCM Inc. or health savings accounts manager HealthEquity Inc.  -- will be rewarded and eventually outperform. The average analyst price target suggests a 30% upside for R1 RCM over the next 12 months and a 9% gain in HealthEquity, Bloomberg data show.

Santangelo is avoiding companies that came to the market via blank check mergers like Babylon Holdings Ltd., an artificial intelligence-driven symptom checker, which has fallen more than 50% since its merger last year. Investors are shunning these companies on their limited disclosures, he said.

Like Santangelo, Citi’s Daniel Grosslight recommends investors focus on pockets of profitability. Change Healthcare Inc., which is awaiting regulatory clearance for an $8 billion purchase by UnitedHealth Group Inc., is Grosslight’s top pick. Even if the deal falls through he is positive on the health-care analytics software company’s standalone value.

Among other preferred stocks are Teladoc Health Inc. and Health Catalyst Inc., which could put up strong performances in the second half, according to Grosslight. 

Teladoc, once a pandemic darling and currently retail trading guru Cathie Wood’s second biggest bet behind Tesla Inc., has plunged more than 75% from February 2021 peak, three months after Wood talked up her bet on a pandemic surge in virtual care at the Sohn Investor conference. 

Still, Wall Street remains relatively divided on Teladoc, with 19 recommending buying the stock and 12 saying hold. 

And some strategists warn investors need to tread carefully amid short rebounds in the market that might be a bear trap.



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