The healthcare sector is one of the largest in the U.S. economy, making up close to 20% of the GDP. Even before the pandemic, an aging Baby Boomer population was driving demand in the sector. The pandemic has only added to this demand through the increased need for medical equipment, such as respirators and pharmaceutical drugs for the treatment and vaccination of COVID-19.
The pandemic also unleashed what looks like a golden age for biotech companies. While tech companies benefited from the pandemic’s stay-at-home protocols, biotech firms are benefiting from the urgency to create treatments and vaccines. This has led to scientific advances that are not only applicable for the virus but for the treatment and prevention of other diseases like diabetes and cancer.
Approximately $3.5 trillion is currently spent on healthcare in the U.S., and that figure is expected to soar in the years ahead. National health spending is projected to reach $6.2 trillion by 2028. When you add in an increase in chronic diseases and conditions, this makes healthcare an enticing sector to invest in. Plus, the sector is quite diversified with multiple industries to consider, which is why I am recommending Cigna Corp. (CI), Johnson & Johnson (JNJ), HCA Healthcare Inc. (HCA), Amgen Inc. (AMGN), and Medtronic (MDT) below.
The biotech industry comprises companies involved in the research and development of new drugs, devices, and treatment methods. Biotech companies use live organisms such as bacteria or enzymes to develop drugs. This use of living organisms is what separates biotech firms from pharmaceutical companies that use chemicals to develop drugs.
While many biotech firms only focus on a couple of breakthrough treatments, larger biotech firms typically have robust pipelines. Biotech stocks are sometimes considered part of the pharmaceutical industry since both make drugs, but the stocks behave differently. For instance, pharmaceutical stocks offer long-term steady returns, while biotech stocks are more growth-oriented with volatility and the potential for more significant returns.
Pharmaceutical companies engage in the research and development of drugs used for medication. Unlike biotech firms, pharmaceutical companies focus more on the manufacturing and marketing of an existing portfolio of drugs. This creates a more dependable revenue stream and a more diversified portfolio of drugs. The global pharmaceutical industry typically tops $1.2 trillion in sales annually.
Many pharmaceutical companies focus on original drugs, in which they hold the patent. In contrast, others specialize in generics, which are identical to the original brand name drugs that no longer have patent protection. There is more competition in generic drugs, which results in lower prices and smaller profit margins. However, there is greater demand due to insurers and government incentives to use lower-cost generics.
Many pharmaceutical companies also manufacture over-the-counter (OTC) drugs such as mild pain relievers and cough medicine.
Medical Equipment and Devices
In addition to drug companies, medical equipment companies also play an essential role in the healthcare sector. These companies make devices used in the care of patients. They range from thermometers and scalpels to robotic surgical systems and MRI machines. This industry benefits from technology innovations in the medical field.
As devices get more advanced, it becomes easier for medical professionals to diagnose and treat conditions. Stocks in this industry can offer growth to investors as the demand for healthcare continues to ramp up. The best companies in this industry create new and innovative products that receive patent protection and government approval.
Companies in the managed healthcare industry provide medical payments. This includes health insurance companies and pharmacy benefits managers. Health insurance companies charge premiums to individuals or employers for insurance to cover medical costs. Pharmacy benefits managers administer prescription drug benefits for employers and health plans.
These companies play an integral role in the healthcare sector. Medical costs can range from a few dollars for over-the-counter medicine to thousands for extensive procedures and medical care. Most individuals cannot afford expensive medical costs out of pocket, so health insurance provides a way to cover those expenses. Since health coverage is essential, the companies typically offer steady returns.
If we have a medical problem, there needs to be a place where we can go to be treated. Even with telemedicine becoming common, most medical treatment still needs to be done in person. That’s where the healthcare facilities come into play. Companies in this industry include hospitals, labs, clinics, nursing homes, and more.
Hospitals play the most important role in the industry as that is where the bulk of the treatment is taking place. If you had an accident, you would go to the emergency room. If you need an X-ray, you go to the radiology department. While hospitals benefit from an aging population that require more treatment, they took a hit last year as the pandemic limited elective procedures that provide the most revenue. But as more people get vaccinated and start visiting hospitals again, their fortunes should rise again.
Why Invest in Healthcare Stocks?
The best answer is that everyone needs healthcare at some point. Even the healthiest individuals should get an annual physical. If you think about how much the healthcare sector is part of the overall market, you understand why a well-diversified portfolio should have exposure to healthcare stocks. In the thirty stocks in the Dow Jones Industrial Average, five are healthcare-related. Healthcare is the second largest sector in the S&P 500 and makes up over 10% of the Nasdaq Composite Index.
In addition to the diverse number of industries in the healthcare sector, the types of stocks are also diverse. There are growth and value stocks, aggressive stocks and income stocks, plus stocks of multiple market capitalizations. This is a sector that is growing faster than the U.S. economy. In fact, the health care percentage of the economy is projected to be almost 20% by 2028.
Healthcare stocks are benefiting from an aging population, advances in treatment for chronic diseases, and technological advances. COVID has led to a surge in innovation for the sector that should only continue to grow.
5 Healthcare Stocks to Buy in 2021
Cigna Corp. (CI)
CI provides pharmacy benefit management and health insurance services. It is one of the largest managed care organizations and pharmacy benefit managers in the country. Its pharmacy benefit services were vastly expanded with its 2018 merger with Express Scripts. CI provides health insurance to employers through self-funding arrangements but also operates in government programs.
The company’s approach to grow and cut costs has proven fruitful as its revenues have been growing consistently over the last few years. CI reduced its debt level and streamlined operations by divesting its Group Life and Disability insurance business. The company is also reducing medical cost growth which should help CI attract more business from existing and potential clients. Its expanding international business also aids growth.
The company has an overall grade of B, which translates into a Buy Rating in the POWR Ratings system. The stock also has a Value Grade of B due to its low valuation. Its trailing P/E is a paltry 11.12, while its forward P/E is also quite low at 12.63. CI also has a Stability Grade of B, which means that it has a history of consistent growth and price performance.
We also grade CI based on Growth, Momentum, Sentiment, and Quality. You can find those grades here. CI is ranked #4 in the B-rated Medical – Health Insurance Industry. You can find other top stocks in that industry by clicking here.
Johnson & Johnson (JNJ)
JNJ is one of the most recognizable names in healthcare. It has been at the forefront of providing pharmaceuticals, medical devices, and consumer health products. The company has seen its share of headlines this year as it began shipping its vaccine in the U.S. in March. Its pharmaceutical division contributes almost 50% of total revenue and has the best future growth prospects.
The company offers several industry-leading drugs, such as immunology drugs Remicade, Stelara, and Tremfya, and cancer drugs Darzalex and Imbruvica. Many of the company’s key drugs and drugs in its pipeline are specialty drugs with strong pricing power and lower regulatory hurdles for approval. JNJ also holds a high market share in the medical device space with orthopedic and Ethicon Endo-Surgery’s surgical devices.
JNJ has an overall rating of A or a Strong Buy in our POWR Ratings system. It also has a Stability Grade of A, which means the company provides steady growth in both earnings and revenue, and price returns. JNJ also has a Quality Grade of B, indicating it has a healthy balance sheet. This is confirmed through its current ratio of 1.3, which means it has more than enough liquidity to handle short-term debts.
You can see how JNJ fares in Growth, Value, Momentum, and Sentiment by clicking here. JNJ is ranked #1 in the Medical – Pharmaceutical industry. If you want to see other top stocks in this industry, make sure to visit this link.
HCA Healthcare Inc. (HCA)
HCA is the largest for-profit hospital company in the country, with a 4-5% market share of the hospital industry. As of December 2020, the firm owned and operated 185 hospitals, 121 freestanding outpatient surgery centers, and a broad network of physician offices, urgent care clinics, and freestanding emergency rooms across nearly 20 states.
While the company is located in almost 20 states, its focus is in Texas and Florida. In those markets, HCA expands its market share by attracting patients, physicians, and insurance companies. It attracts physicians by investing in its facilities to improve its offerings to appeal to surgeons. It also generates higher patient approval ratings. The company attracts health insurers with transparent pricing trends. HCA has also benefited through cost curbing and expanded telemedicine offerings.
HCA has an overall rating of A, which is a Strong Rating in our POWR Ratings system. The company has a Value Grade of B, which makes sense as both its trailing and forward P/E are 15. HCA’s price-to-sales ratio of 1.4 is also below the industry average. HCA also has a Sentiment Grade of B, which means it is well-liked by analysts. According to the StockNews Price Target feature, eighteen out of twenty-two analysts have a Strong Buy or Buy rating on the stock.
We also provide grades on growth, Momentum, Stability, and Quality, which you can grab here. HCA is rated #1 in the A-rated Medical Hospitals industry. For other top stocks in that industry, click here.
Amgen Inc. (AMGN)
AMGN is a biotechnology-based human therapeutics leader with historical expertise in renal disease and cancer supportive care products. Its flagship drugs include red blood cell boosters Epogen and Aranesp, immune system boosters Neupogen and Neulasta, and Enbrel and Otezla for inflammatory diseases. AMGN’s five key products are among the top-selling drugs in the world.
While the company hasn’t had a recent blockbuster since Prolia/Xgeva in 2010, cholesterol drug Repatha and migraine drug Aimovig are setting the firm up for strong growth in the years ahead. Plus, immunology drug Otezla is poised to be a top product by the end of the decade. The company has been working on growing its own biosimilar business, which will be a critical growth catalyst over the long term.
AMGN has a Buy rating and a grade of B in our POWR Ratings system. It also has a Value Grade of B, as it continues to trade below its intrinsic value. The company has an EV/EBITDA of 12.4, well below the industry average. Plus, its forward P/E of 14.41 is also low. AMGN also has a Quality Grade of A due to its rock-solid balance sheet. As of March, the company had $10.6 billion in cash, compared with only $1.6 billion in short-term debt.
One of the largest medical device companies, MDT develops and manufactures therapeutic medical devices for chronic diseases. Its portfolio includes pacemakers, defibrillators, heart valves, stents, insulin pumps, spinal fixation devices, and surgical tools. The company markets its products to healthcare institutions and physicians in the United States and overseas.
The company essentially has exposure to all major medical tech markets with a robust pipeline of new product launches. Its leadless pacemaker is seeing strong demand, and this should continue due to the Micra AV product, which expands the potential patient market. While the pandemic did affect the company, MDT weathered COVID relatively well and should bounce back considerably as elective procedures ramp up. Plus, the company is a market leader in core heart devices, spinal products, insulin pumps, and neuromodulators for chronic pain.
MDT has an overall rating of B or a Buy rating in our POWR Ratings system. The company also has a Growth Grade of A, which isn’t surprising as earnings are expected to rise 112.90% in the current quarter and 28.2% for the year. MDT also has a Stability Grade of B which means its financial and price performance has been stable.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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