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3 Ways to Profit From the Healthcare Sector’s Surge

As America's elderly population explodes, so too will these healthcare businesses

   

Healthcare stocks took off in 2013, with the sector putting up some of the best gains on Wall Street. Among the S&P core sectors, healthcare stocks dramatically outperformed even the impressive 30% jump for the stock market as a whole with roughly 39% gains for the sector.

The run was largely due to anticipation of the Affordable Care Act (aka Obamacare) opening up new “customers” to many healthcare providers.

But thanks to delays with the rollout and implementation of Obamacare coupled with big demographic opportunities created by the aging baby boomers, there remains significant upside in 2014 for healthcare stocks as well.

Here’s why I like the healthcare sector in 2014, followed by three specific trades to make:

A Healthcare Megatrend

If you’re interested in Obamacare, consider the multiple hangups with this rollout, including the fact that penalties for forgoing insurance will be delayed. That could mean the full pop from this legislation is a bit delayed, too.

There have been a host of other delays, including pushing the requirement for ACA implementation at mid-sized and large employers back to 2015 and a delayed launch of the small-business exchange until November 2014.

That means the long-term potential of new “customers” created by Obamacare has barely gotten started.

Beyond this policy push, there’s also the simple fact of demographics creating a bigger need for healthcare services — particularly elder care, cancer care and other treatments that target older Americans.

The numbers are clear and well known — the most common being that there are more than 41 million Americans age 65 or older now, and the Census Bureau estimates that figure will rise to 79.7 million by 2040. Older folks need more care, and more care means more demand for healthcare.

And if you really want to be comprehensive about the healthcare opportunity, consider the upside for emerging-market spending. The U.S. spends almost 18% of its GDP on healthcare, and Germany and France spend around 11%, according to the World Bank.

Now consider that China spends about 5% and India about 4%. These countries need to double their healthcare spending to be on par with the West — and that’s based on current GDP to boot.

Throw in the fact that healthcare stocks are generally recession-proof, and you have a good case to keep a strong foothold in this sector for both growth and stability in the new year.

Now, for those trades …

Buy XBI

One of the hottest investments you can make in the healthcare sector is on a biotech stock that breaks out as it comes up with an innovative new drug that creates billions in revenue or prompts a big-ticket buyout from a major pharmaceutical player.

Of course, these stocks are highly volatile and full of as many busts as breakouts … so I recommend the SPDR S&P Biotech ETF (XBI) as a broad-based way to play the potential of smaller biotechnology companies.

There are other similar funds out there, such as the iShares Nasdaq Biotechnology ETF (IBB), but this iShares fund is biased toward established players like the $115 billion drug company Gilead Sciences (GILD). With XBI, you’ll get much smaller holdings like $1 billion biotech Ariad Pharmaceuticals (ARIA) as top positions … meaning a bit more risk, but a bit more upside potential.

Read more about XBI on the official site here.

Buy Celgene

Of course, if you do want to play biotech via single stocks, I recommend Celgene (CELG).

Celgene sounds complicated when you dig into its products, including sophisticated treatments for cancer and inflammatory-related diseases, but a simple look at the fundamentals tells you everything you need to know.

Fiscal 2013 revenue should finish up at $6.43 billion — 16% better than 2012 numbers, and almost twice the $3.6 billion recorded in fiscal 2010. Profits are even more impressive, with earnings set to grow over 60% in fiscal 2013 to around $5.40 a share — and nearly three times fiscal 2010 profits of $1.88.

It’s easy to make the macro case for healthcare stocks, but CELG is my favorite individual player because of its strong fundamentals.

Plus, just about a month ago, Celgene announced a partnership with OncoMed (OMED) to jointly develop six potential anti-cancer drugs, and that could create huge future upside.

So with a plush product pipeline, tremendous earnings momentum and a pretty fair forward price-to-earnings of about 22, there is a good chance CELG could outperform again in 2014.

Buy Senior Housing REITS

Another corner of the market I’m bullish on are senior housing real estate investment trusts, or REITs. As boomers age, they frequently need a facility to accommodate their medical needs but also their social and emotional needs as well.

If you invest in a REIT that focuses on senior living, you have big income potential from the dividends that range between 5% and 7% at players like Senior Housing Properties Trust (SNH), Ventas (VTR) or Health Care REIT (HCN).

If you believe in the long-term potential here, getting in now could mean a heck of an income stream as dividends move even higher in the next decade. These picks aren’t as “growth” as other healthcare stocks, but they are very stable — and after recent underperformance, could be big bargains in the new year.

Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP

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