Formerly plodding and defensive to the core, healthcare stocks are having another tremendous year. Indeed, at a time when the S&P 500 has done almost nothing, healthcare stocks are almost single-handedly keeping it positive for the year-to-date.
Healthcare is the best-performing sector of the S&P 500 this year, generating a total return of 11%.
There’s no secret as to why.
Investors have been piling into healthcare stocks ever since the White House starting pushing the Affordable Care Act. The expansion of health insurance coverage is creating millions of new customers for the industry. At the same time, the population is getting older. Those two forces are driving record spending on healthcare, and that’s boosting revenue, earnings and sentiment across the sector.
Sure, as much as broad bets on healthcare stocks have been working out, you always have to worry about valuations getting stretched. Additionally, there’s the headwind of rising interest rates. At some point in the not-too-distant future, the Federal Reserve is going hike, and that’s going to hit smaller stocks — which rely more on debt to grow — than larger ones.
That got us thinking about the best large-cap healthcare stocks to buy in this environment. Large caps tend to be less volatile, for one thing, and should mostly shrug off interest-rate fears.
Additionally, you’re more likely to find value in large caps. They usually have lower growth forecasts because its hard to make really big gains off a large base. That keeps out the greedy money and puts a lid on valuations.
When it comes to size, scope, valuation and stability, these are the five best large-cap healthcare stocks to buy:
Healthcare Stocks to Buy: CVS Health (CVS)
CVS Health (CVS) has an enviable combination favorable demographics and macro tailwinds. As both a retail pharmacy business and pharmacy benefits manager, CVS gets a lift from the Affordable Care Act and the aging of the baby boomers.
The expansion of healthcare coverage and the rising ranks of elderly people gives CVS a solid organic growth profile, but the company also is bulking up through acquisitions. In addition to buying Target’s (TGT) pharmacy chains, CVS scooped up Omnicare (OCR), which extends its reach into nursing homes and related facilities.
But the acquisitions have another advantage. The bigger CVS gets, the more power it has a pharmacy benefits manager when haggling over drug prices. That allows CVS to save its clients money — and pick up market share, too.
Healthcare Stocks to Buy: HCA Holdings (HCA)
As a operator of hundreds of hospitals and surgery centers, HCA Holdings (HCA) is as well-positioned as any sector stock to benefit from rising spending on healthcare.
Indeed, the great extension in coverage helped HCA easily beat Wall Street’s top- and bottom-line estimates in the most recent quarter. Analysts forecast that higher admissions have HCA on track for revenue growth of more than 7% this year, and an earnings-per-share gain of 13%, according to Thomson Reuters.
We’re still in the early stages of increased healthcare spending and other tailwinds, and that’s fueling positive sentiment for HCA stock.
Solid and likely accelerating growth has HCA stock up 25% for-the-year to date, vs. a gain of less than 2% for the broader market.
Healthcare Stocks to Buy: Johnson & Johnson (JNJ)
Johnson & Johnson (JNJ) — a component of the Dow Jones Industrial Average — has always been a popular defensive dividend stock, but rising healthcare spending and an aging population have juiced its growth profile as well.
JNJ has unique exposure to the sector’s favorable macro tailwinds. As a pharmaceutical company, medical device company and maker of consumer products, it’s products can be found from the back of the drugstore to the front.
True, the pharma business is the star of JNJ — it boasts a long list of blockbuster drugs — but the other two segments more than pull their weight with cash flow.
That helps JNJ maintain heavy investment in research and development — which always bodes well for the long term — as well as pay a very sturdy, longstanding dividend yielding 3%.
Healthcare Stocks to Buy: Pfizer (PFE)
Pfizer (PFE) — another Dow stock — became the world’s largest pharma company through acquisitions, and it’s not letting up. Earlier this year, PFE bought Hospira (HSP) in deal valued at about $17 billion.
Smaller tuck-in acquisitions are also strengthening Pfizer’s pipeline, and with a number of biosimilar blockbusters close to approval, the company is expected to recharge its top-line growth over the next 18 months or so. Indeed, analysts expect revenue to increase almost 13% next year.
The promise of brighter times ahead has PFE stock up 13% for the year-to-date, yet the dividend is still very generous by current standards. With a yield of 3.16%, Pfizer’s payout dwarfs the market average of 2.04%.
Healthcare Stocks to Buy: UnitedHealth Group (UNH)
Health insurance giant UnitedHealth Group (UNH) is up more than 20% so far this year, but a number of analysts think it’s still too cheap. They’re right.
Heck, as a health insurer, revenue is blooming, with estimated growth of 18% this year and 16% next year. And yet UNH trades at less than 16 times forward earnings. That’s significantly cheaper than the broader market, and in no way reflects its projected long-term growth rate of more than 12%.
Size is key in this sector, and as the biggest health insurer, UNH is able to throw its weight around when negotiating prices with providers. That not only boosts margins, but lets it take market share, as well.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
