If you’re worried that the market is getting a bit too rich, or if you’re simply an income-oriented investor who prefers stability and dividends to risky small caps, then healthcare is the right sector for you.
Many companies in the healthcare sector offer a great combination of stability and growth.
The stability comes from reasonable valuations that are below the current market norms, with a forward price-to-earnings ratio of about 16 for the typical S&P 500 stock. And the growth comes from a demographic shift where aging baby boomers will naturally demand more care and the Affordable Care Act (aka Obamacare) is putting more “customers” on the rolls of insurance companies with the ability to seek treatment.
There are admittedly some high-risk sectors of healthcare, such as development-stage biotechs, or low-growth segments such as aging pharmaceutical giants who are seeing their product pipelines run dry.
But this list of five solid healthcare plays features companies in the sweet spot between low risk and high return. Here they are, in no particular order:
Heathcare Stocks to Buy – Teva Pharmaceutical Industries (TEVA)
Market Cap: $49 billion
YTD Performance: +29%
Dividend Yield: 2.7%
Teva Pharmaceuticals (TEVA) isn’t a household name like blue-chip drugmakers, and it isn’t a high-powered biotech darling researching impressive new cures, either.
Teva is actually quite boring, really, as the world’s largest manufacturer of generic medications. After a big company has run its course with a patented medication, TEVA steps in and makes the same drug, then sells it for less to patients who need it.
The margins are thinner, but you can make up for this with scale — and with more than $20 billion in sales annually in all corners of the globe, Teva certainly has scale.
Now, there’s no breakout potential in TEVA stock since drug research isn’t really its game. But for low-risk investors, that’s a big plus — because unlike some other pharma stocks out there, patent expiration will never be an issue that weighs on its margins.
With a nice dividend yield, too, TEVA stock has a lot to offer investors who are looking for solid and reliable income plays for the long term.
Heathcare Stocks to Buy – Allergan (AGN)
Market Cap: $47 billion
YTD Performance: +41%
Dividend Yield: 0.1%
Allergan Inc. (AGN) doesn’t have much of a dividend. But it does have an amazing balance sheet and rock-solid growth prospects that are pushing the stock sky-high.
Allergan recently blew away Q2 forecasts for earnings and revenue, and enjoyed a spate of analyst upgrades as a result — including making its way on to Merrill Lynch’s list of the best healthcare stocks to buy.
Unlike other high-growth stocks, AGN also has a stable revenue base thanks to established drugs that include well-known Botox anti-aging injections.
This is a win-win situation for investors because it guarantees great profits if AGN keeps it up, but also makes Allergan attractive should another company swoop in and pay a big premium to acquire it.
Heathcare Stocks to Buy – HCP (HCP)
Market Cap: $19 billion
YTD Performance: +16%
Dividend Yield: 5.2%
One of my favorite rock-solid investment themes in healthcare is the demographic tailwind of the baby boomer population; these older Americans will naturally drive up demand for treatment and care as they age.
And with a dividend yield of 5.2% and a great balance sheet, HCP Inc. (HCP) is one of the best high-yield ways to play this trend.
HCP is structured as a real estate investment trust, but focuses mainly on healthcare real estate including senior housing and medical offices. HCP has the mandate to deliver at least 90% of its taxable income back to shareholders in the form of big dividends.
Also, as Dan Burrows recently pointed out, HCP has a very low beta — meaning it moves less than the market at large and is characterized by low volatility, even if the S&P 500 is making big swings.
All in all, HCP’s stability and dividend potential make for an appealing one-two punch.
Heathcare Stocks to Buy – Johnson & Johnson (JNJ)
Market Cap: $289 billion
YTD Performance: +12%
Dividend Yield: 2.7%
Johnson & Johnson (JNJ) is an old favorite among defensive dividend stocks. It’s a healthcare play, but also a consumer staples play thanks to popular brands including Band-Aid, Tylenol and Splenda.
Those two segments are the most bulletproof in all the market, and owning a leader in both staples and healthcare ensures a great foundation for your portfolio even in rough times. The healthcare angle makes JNJ stock pretty recession-proof, since medical expenses don’t go away even in tough times, and the company’s consumer-brand power gives it stability for the long run.
Many investors soured on Johnson & Johnson after the company struggled from 2010 to 2012 amid quality-control issues and big product recalls. However, JNJ has roared back since January 2013, gaining 45% to outperform the S&P 500. And that doesn’t even include the returns from JNJ’s 2.7% dividend yield.
With a recent tailwind at its back and a long history of stability and income, JNJ is a great play for whatever comes your way in 2014 and beyond.
Heathcare Stocks to Buy – WellPoint (WLP)
Market Cap: $31 billion
YTD Performance: +21%
Dividend Yield: 1.6%
Among healthcare stocks, WellPoint (WLP) doesn’t have the most attractive dividend at just 1.5% in yield.
However, WellPoint has seen the biggest success with Obamacare among major insurers. The company had 400,000 new enrollees at the end of Q1 and had said its policies were already running at a profit. That total has increased to almost 770,000 — far surpassing targets of 600,000 Obamacare enrollees and a sign of growth to come for WLP.
WLP is the second-largest health insurer in the U.S., and already had the scale to hang tough in any market. But this Obamacare momentum coupled with a return to consumer-facing marketing should help it grow even more.
WLP stock is up more than 20% year-to-date and trades for about 12 times forward earnings, making it at worst a fairly valued stock but potentially a good long-term buy as this momentum continues.
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 email@example.com or follow him on Twitter via @JeffReevesIP.