Healthcare stocks are among some of the most lucrative options in the market. Whether it’s pharma companies coming up with the next blockbuster drug, biotech companies treating hard-to-cure diseases or hospitals treating an increasing number of aging baby boomers, healthcare has growth catalysts aplenty.
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Your challenge? Separating the studs from the duds.
The trend of pharmaceuticals in the markets have not made the obstacle any easier. Although exchange-traded funds covering pharmaceuticals — such as the popular PowerShares Dynamic Pharmaceuticals ETF (PJP) — have outgunned their macro-counterpart in the form of the S&P 500, the recent performance of Big Pharma has declined significantly. This typically entails a consolidation pattern, in which stocks take a “break” from a long rally, only to continue on with their bullish money trail later.
However, three healthcare stocks look ready to wake up from this price-action nap. They are, in no particular order:
Healthcare Stocks: PharMerica (PMC)
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But the bread ‘n’ butter for PMC stock is the delivery of prescription drugs to nursing homes … and this is where things get interesting.
PharMerica’s larger business rival, Omnicare (OCR), attempted to buy out PMC four years ago, but was thwarted by the Federal Trade Commission, which cited a disruption to free-market competition. Ironically, Omnicare itself was acquired just recently by a pharmacy giant — to be revealed in the next page — setting the stage for Round 2 of PharMerica buyout rumors.
PharMerica’s faithful are sitting pretty. While the technical ride has been quite choppy, PMC stock has a statistical tendency — going back to its initial public offering in August 2007 — of building off previous gains in the markets. Well, PharMerica is up more than 55% year-to-date. And since May 11 of this year, PMC stock is up nearly 7%, which yields a 68% likelihood that over the next five weeks, shares will continue to move further north.
With rumors that Walgreen and UnitedHealth Group (UNH) may be potential suitors, we can surely expect exciting developments for PMC stock.
Healthcare Stocks: CVS Health (CVS)
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Despite recently posting all-time record highs on 4% year-to-date gains, CVS stock appears to still have plenty of gas in the tank. It also turned up the heat in the mergers and acquisitions arena, buying out the aforementioned Omnicare, the main rival to PMC.
For this and a host of other reasons, Wall Street nodded its approval, with Macquarie Capital upgrading CVS stock to “outperform.”
Buttressing Macquarie’s assessment — which gave CVS stock a price target of $115 (about 13% higher from current prices) — is an ongoing rumor that Humana (HUM) may be sold to the highest bidder. In response, the markets have been attempting to digest the potential impact for the retail pharmaceuticals industry. Analysts from JPMorgan have weighed in on the situation, noting that a buyout of HUM by either Aetna (AET) or Cigna (CI) should be bullish for CVS stock.
When it comes to its technical prognostication, an old market adage offers excellent advice: The trend is your friend until the end.
Unless something critically unsound about the company is exposed, the recent let-off in CVS stock is likely nothing more than a consolidation phase. On a monthly chart of CVS stock, we can observe the development of a continuation pattern, which should resolve to the upside so long as shares can beat the pattern’s upper resistance line.
With so many M&A rumors swirling about, CVS stock is more likely than not to meet — and perhaps exceed — Wall Street’s lofty expectations.
Healthcare Stocks: Rite Aid (RAD)
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After years of struggling to stay afloat in the markets, RAD stock simply ran out of steam — shares traded around the $1-$1.50 area for years after the Great Recession.
What happened over the next few years can only be described as a “Miracle on Wall Street,” with RAD stock rocketing up more than 700% from its dollar-menu lows to its current prices around $9.
The best part for investors is that fundamentally, RAD stock shows no sign of slowing down. RAD has reported 10 consecutive quarters of Street-meeting or beating earnings. More recently, Rite Aid reported strong sales results for the month of May, with comparable-store sales — or comps — rising 2.1%, thanks to an improvement in both store-front product revenue and sales specifically related to pharmaceuticals.
Additionally, Rite Aid is intent on growing its Health Alliance Program, which allows the pharmacy access to multiple healthcare providers for the purpose of offering holistic solutions to patients requiring long-term care.
The technical picture for RAD stock — though it should likely turn out bullishly — is somewhat akin to a perceptual illusion. On one hand, the up-down swing that occurred between late 2013 until the fall of 2014 in RAD stock could be described as a bearish head-and-shoulders pattern. On the other hand, however, the second shoulder of the aforementioned bearish formation could just as well be interpreted as the head of an inverse head-and-shoulders pattern. This would then entail a bullish move upward and confirm the optimistic sentiment many in Wall Street have toward RAD stock.
It may have been a market stinker in the past, but RAD stock’s turnaround is the real McCoy!
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
