Healthcare stocks have been a favorite of mine for some time, to the point that it’s difficult to come up with a creative new way to speak about the sector.
It’s pretty simple, so most articles like this start with the same three ideas:
- Baby boomers are aging and the demographic push will increase demand for care
- Emerging-market consumers are getting better access to the latest medical technology
- Healthcare stocks are recession-proof since people cut back on everything else before drugs or treatments that reduce pain and extend their lives
The proof is in the performance; Consider that major healthcare ETFs including the Health Care SPDR (XLV) and the Vanguard Health Care ETF (VHT) have significantly outperformed over the long term, with both funds up over 120% in the last 10 years vs only 60% for the S&P 500 in the same period, and up over 140% in the last five years vs. less than 80% for the S&P.
But not all healthcare stocks are created equal, and in a choppy market even a bit of outperformance may not be enough to deliver the gains you’re looking for from your portfolio.
However, a select group of healthcare stocks offer tremendous upside in the coming months regardless of what happens to the major indices.
Here they are:
Healthcare Stocks to Buy: Incyte Corporation (INCY)
Incyte Corporation (INCY) is a high-octane biopharmaceutical company focused on rare blood cancers. Like many fast-moving biotechs, INCY is not yet profitable as it continues to push forward its drug pipeline … but that hasn’t stopped investors from piling in with high hopes about its potential.
Consider that INCY stock is up more than 70% year-to-date and up about 800% since 2011 as proof of Wall Street’s optimism.
There will be continued upside, too, if Incyte can keep exceeding expectations with its drugs, which treat obscure conditions like myeloproliferative neoplasms. Even though patient pools aren’t large, with only a few hundred thousand folks suffering from certain blood cancers INCY is researching, a lack of effective medications and treatments for these conditions means the FDA is very eager to push these drugs to approval — and, of course, Incyte will have a monopoly on the market if and when it wins approval.
It’s not just the potential of the drugs themselves, either, but the potential of INCY itself, as specialized biotech stocks of this nature are always tempting targets.
There is risk, of course. A lot of success is priced into the stock and a dud of a drug trial could gut share prices. But momentum is on Incyte’s side, and this big winner could move significantly higher in the coming months if the chips fall right.
Healthcare Stocks to Buy: Amgen (AMGN)
Amgen (AMGN) is also a biotech player, but much more entrenched. It’s a profitable company with a market cap of over $100 billion, and thus not quite as risky as Incyte.
But Amgen has significant upside potential, too, especially after shares have been unfairly caught in the recent market selloff. In fact, AMGN stock is down by about 10% in the past month — making now a bargain buying opportunity for savvy investors.
The recent FDA approval of Amgen’s cholesterol-fighting drug evolocumab is boon to long-term sales, given the massive potential of cardiovascular drugs like this.
That’s just the latest win from the impressive Amgen drug pipeline, too, which continues to yield successes and fuel growth; AMGN will see a modest 6% jump in revenue this fiscal year but a 12% jump in profits thanks to better margins. And as InvestorPlace analyst James Brumley recently pointed out, “Owners of Amgen stock should appreciate the fact that the company has a robust pipeline, including 12 phase 3 trials” that could result in even better performance down the road.
Of course, Amgen is not immune to patent expirations, and biosimilars from rivals may start to take their toll. However, Amgen not only has a robust product pipeline, but also a will to stay dominant as evidenced by its 2013 acquisition of Onyx Pharmaceuticals for over $10 billion and the ability to deploy an additional $30 billion in cash and investments on other deals going forward.
The payoff may not be as quick as with a smaller biotech like Incyte, but Amgen is clearly tightening its grip on the drug market and becoming one of the new leaders in pharma.
Healthcare Stocks to Buy: Baxter International (BAX)
Baxter International (BAX) spun off its drug business a few months back to create Baxalta Inc (BXLT) and firmly focus its business on medical devices like pumps and surgical tools.
And while on the surface that sounds like making the company a bit more boring, the move is actually an opportunity to unlock serious value from BAX stock.
At least, that’s how activist investor Dan Loeb of Third Point sees it. In August, it was revealed that Loeb is seeking two board seats on Baxter, with hopes of making a big profit on a large stake in BAX stock. It’s part strategic benefit of spinning off BXLT and part news that longtime CEO Robert Parkinson will be departing, allowing for an influx of fresh talent at the top positions of the company.
Baxter has slumped by about 15% since August thanks to market volatility and investors digesting the spinoff. However, longer-term investors should keep in mind that the streamlined device business of Baxter is not just free of the drug research expenses and patent issues of Baxalta, but also much better equipped to weather any downturns.
If you’re more concerned with stability than short-term flash, Baxter could provide significant upside in the next year as Loeb shakes up this company to wring out more value. While there isn’t quite the breakout potential like a biotech, there is a very firm floor given the recent stake by Third Point and the slow-and-steady nature of medical device sales.
Healthcare Stocks to Buy: HCP Inc. (HCP)
Speaking of slow and steady, you can’t get much safer than HCP Inc. (HCP) for consistent long-term returns. That’s because HCP is a real estate investment trust with a portfolio of health-care-related properties, throwing off consistent income.
In fact, that income is so consistent that HCP is a dividend aristocrat – meaning it has increased its distributions at least once a year for over 25 years running. Specifically, the dividend has been paid (and increased once a year) on an uninterrupted basis since 1985.
HCP isn’t just offering up a market-rate payout, either, with a yield of 6.3% right now. And with adjusted funds from operations at 73 cents a share last quarter, the dividend of 56 cents per share quarterly is quite sustainable at a 76% payout rate.
Now, dividend growth hasn’t burned down the house in recent years and share performance has been sluggish. But what you’re buying in HCP isn’t momentum or the hope of a stock that doubles overnight. Consider the super-low beta of less than 0.3, indicating this stock “wiggles” less than a third as much as broader market does. That means getting left behind during a mammoth rally, yes, but it also means hanging tough no matter what Wall Street throws your way.
Given the long-term demographic trends that will continue to boost demand for health care — particularly senior housing as the baby boomers age — there are few stocks that are better positioned for the long haul than this dividend aristocrat. And since HCP is now a bargain after recent declines, trading at just 11 times forward earnings, the worst-case scenario is you get a huge dividend in a stock that doesn’t go anywhere.
But if shares do start to move higher, your total return could be quite impressive.
Healthcare Stocks to Buy: Teva Pharmaceuticals (TEVA)
Teva Pharmaceuticals (TEVA) made news this summer with a massive $40 billion buyout of the generic drug division of Allergan (AGN). The market was thrilled, too, and responded with a big 16% pop for the pharma giant.
Of course, that was before the volatility of August wiped out nearly all of those gains.
But rather than see this as a sign that TEVA stock is in trouble, the pullback should be seen as a big buying opportunity for traders. After all, the enthusiasm over the Allergan acquisition was well-founded, and no short-term swing in prices can change that.
First, it’s about cost reduction through improved operational efficiency. Secondly, the deal is about larger market share for Teva and a firm space as the largest generics manufacturer in the world.
This focus on generics is key. After all, companies like Pfizer (PFE) and Merck (MRK) are struggling to replace their aging portfolio of drug patents and the idea of not being tied to expensive research or high-stakes FDA trials is pretty appealing.
There are lower margins, of course, but when you have the scale of Teva and the potential for increased efficiencies after a big Allergan segment buyout … then who cares?
Competition is always a risk in the generics space, but TEVA’s scale and efficiencies should allow it to make very good deals with insurance companies and distributors going forward. And considering TEVA has a forward price-to-earnings ratio of under 11, it’s hardly like investors are paying a big premium for this stock right now.
Bargain pricing and huge potential after its recent deal should mean significant upside for Teva stock in both the coming months, and in the long term.
Healthcare Stocks to Buy: Gilead Sciences (GILD)
Don’t tell Gilead Sciences (GILD) shareholders that the market has gotten more selective in 2015 and that gains are harder to come by lately; GILD is up 16% year-to-date, and up more than 45% since the beginning of 2014.
That’s because Gilead Sciences has a great list of drugs in development, with many nearing the end of all-important phase 3 trials — the last step before the FDA opens the floodgates to massive testing on thousands of volunteers. Investors are very optimistic about a bunch of these medications, including a series of HIV treatments, and have been bidding shares up as a result.
The amazing thing, however, is that a steady stream of approvals and sales growth has prevented investors from getting too far ahead of this stock. Consider that right now, GILD stock trades for less than 10 times next year’s earnings even after the recent outperformance! That’s thanks to massive revenue growth that should hit 27% this year, and earnings growth on track to hit 44%.
You can’t argue with profits, and you can’t fight the tape. While many development-stage drug companies are risky bets, Gilead has a strong long-term track record of share appreciation and continued growth thanks to a successful product pipeline.
With the super-cheap valuation right now after a recent cooling off in shares, it’s a no-brainer to snap up GILD here.
Healthcare Stocks to Buy: Johnson & Johnson
Johnson & Johnson (JNJ) is everything an income investor should love. As a dividend aristocrat, it has a long track record of dividend growth and as an entrenched mega-cap worth almost $260 billion it has a huge level of stability.
Throw in the fact that J&J is one of only three companies with a AAA credit rating — Microsoft (MSFT) and Exxon Mobil (XOM) are the other two — and you have an incredibly compelling long-term case for this healthcare giant.
Investors might scoff at the notion of JNJ stock as a profit machine, however, seeing as the stock has been stuck in a bit of a rut for the last year or two and has basically flat-lined since summer 2013.
But long-term investors need to think in terms of total return and performance over the decades and not just a few years, and consider the attractive forward P/E of about 14 for Johnson & Johnson right now. Tack on a juicy 3.3% dividend yield, and you have a lot of stability.
And beyond Johnson & Johnson being a bedrock stock and dividend growth machine, investors should consider that headwinds from a strong dollar and a weak growth outlook for 2015 has ensured all the negativity is now baked in.
It won’t take much for JNJ to impress investors going forward given the bleak forecasts from a few months back, and considering Wall Street has a consensus price target of about $110 a share — nearly 20% upside from here — you might not want to bet against Johnson & Johnson here.
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.
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