Healthcare stocks are leading the market once again in 2015, a state of affairs that has been common over the past three years and doesn’t look to end anytime soon.
Powerful demographic forces have been a tailwind for healthcare stocks for some time now, but it’s the more recent macroeconomic developments that have healthcare stocks outperforming by such wide margins.
The aging of the baby boomers — that cohort of roughly 80 million Americans entering their retirement years — are a well-known driver of healthcare stocks. Less expected was that this demographic pressure would combine with a huge expansion in health insurance coverage, as well as record healthcare spending.
Now, between those two forces, healthcare stocks — ordinarily somewhat sleepy, defensive shares — have become hot properties generating tremendous outperformance.
Heck, for the year-to-date, the healthcare sector is the top performer in the S&P 500 with a gain 8% on a total return basis. The broader market is up just 2.7% including dividend so far this year. And over the last 52 weeks, healthcare stocks in the S&P 500’s healthcare sector delivered a total return of more than 30%, essentially doubling the performance of the broader market.
As much as broad bets on healthcare stocks should continue to outperform, some sector names look more likely to lead the pack over the long haul than others. Here are five healthcare stocks to buy for long-term success.
5 Healthcare Stocks to Buy — Health Care REIT, Inc. (HCN)
As a real estate investment trust (REIT), Health Care REIT, Inc. (NYSE:HCN) has to pay out the majority of its earnings as dividends in exchange for tax benefits. Fat dividends are one reason to like healthcare stocks like healthcare REITS, but they’re not the only thing to like.
HCN operates senior living facilities, hospitals, medical offices and other properties, and it offers a combination of fat dividend and solid growth. Indeed, HCN is working hard to capture its fair share — and then some — of the growing healthcare pie.
An aggressive strategy of acquisitions and investments has HCN on a market-beating growth trajectory. At the end of 2014, HCN completed $1.8 billion of gross investments, led by its $950 million acquisition of HealthLease Properties Real Estate Investment Trust.
With its focus on growth in an expanding market, HCN looks like an excellent longer-term buy, collecting income from the 4.3% yield on the dividend all the way.
5 Healthcare Stocks to Buy — Anthem Inc (ANTM)
Formerly known as Wellpoint before a recent rebranding, Anthem Inc (NYSE:ANTM) is one of the best insurers to play on soaring spending for healthcare. That’s because it was the No. 1 beneficiary from Obamacare enrollments.
Those enrollments help Anthem chug along with much better revenue growth than the broader market. Sales are forecast to rise 9% this year, which is none too shabby for a large-cap stock.
Shares are up about 23% for the year-to-date and still look to offer a good value. ANTM trades hands at just 14 times forward earnings — cheaper then the S&P 500 — while having a superior long-term growth rate.
True, that’s a premium multiple for a healthcare insurer — and is higher than ANTM’s own five-year average — but the new age in healthcare more than justifies it.
5 Healthcare Stocks to Buy — Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is sort of a classic defensive dividend stock. It has been around forever and has exposure to both healthcare and consumer staples with its range of products sold in the front of drug stores.
Many investors — most famously Warren Buffett — soured on Johnson & Johnson after the company struggled from 2010 to 2012 amid quality-control issues and big product recalls.
Happily, JNJ stock has put that episode behind it. Indeed, it’s up a solid 47% since the start of 2013 on a price basis. And the 2.8% yield on the dividend makes JNJ a total-return winner vs. the S&P 500 over that time frame.
JNJ isn’t going to wow anyone with its growth trajectory, but it will surely impress the next time the economy or market turns south. Medical expenses don’t go away in tough times, and the company’s consumer-brand power gives it stability for the long run.
5 Healthcare Stocks to Buy — Stryker Corporation (SYK)
Stryker Corporation (NYSE:SYK) is the largest manufacturer of artificial hips and knees, among other products, putting in in prime position to benefit from the increasing decrepitude of the boomer generation.
The demographic benefit is more than large numbers. Boomers are more active than previous cohorts of the elderly. That makes them more likely to need artificial joints an other orthopedic devices.
Furthermore, boomers have longer life spans than their parents. But artificial joints have finite lifespans, and can need major overhauls in as few as 10 years. Customers with active lifestyle and longer life spans amplify the effects of the boomer generation.
That outsized growth trajectory can already be seen. A decade ago, SYK had revenue of a bit more than $4 billion. That figure will hit $10 billion by the end of 2015. Medical technology does a better job than ever of keeping folks ambulatory in their senior years, and that’s a boon for SYK.
5 Healthcare Stocks to Buy — CVS Health Corp (NYSE:CVS)
CVS Health Corp (NYSE:CVS) is the nation’s No. 2 pharmacy chain, but it may not stay there for long. After all, it’s already bigger than Walgreens Boots Alliance Inc (NASDAQ:WBA) by market capitalization — by about $15 billion — and it has a higher long-term growth rate (15% vs. 14%.)
One tailwind for CVS these days are from biosimilars and its foray into the business of being a pharmacy benefits manager. The U.S. Food and Drug Administration just approved the use of a biosimilar drug for the first time. (Biosimilars are sort of like generic versions of biotech drugs.)
Thanks to CVS’s role as a pharmacy benefits manager, it should be able to sell these pricey drugs for less, further boosting the volume of prescriptions filled.
There’s no question that boomers will need increasing numbers of medications as they age, and CVS is well-positioned to gain market share with its ability negotiate lower prices.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.