Want to make money on the stock market? One of the best ways to find good healthcare stocks to buy is by following the best ideas of successful portfolio managers.
How do you find them?
Well, you could use a mutual fund screener to find top performers. Or, you could do a Google search for mutual funds that gained notoriety in 2018 and buy the fund manager’s best ideas. I’m talking about stocks in the top 10 or top 25 holdings.
The only problem with this solution is that mutual fund holdings aren’t real time, so you’re usually getting a list of stocks that are stale, dated, and no longer at the top of the fund manager’s holdings list or even a holding 4-6 weeks after the end of the quarterly report.
This little problem aside, it’s still an excellent way to get ideas, even if you ultimately don’t pull the trigger. And two of the best-performing categories of mutual funds in 2018 were large-cap growth and healthcare funds.
One of these healthcare funds was the T. Rowe Price Health Sciences Fund (MUTF:PRHSX), which had a total return of 1.23% last year, 561 basis points higher than the S&P 500.
Trailing the index by a significant amount through the first four months now might be the perfect time to check out its holdings list for healthcare stocks to buy.
Healthcare Stocks to Buy: United Health (UNH)
UnitedHealth Group (NYSE:UNH) is the fund’s number one holding with a weighting of 6.5% as of March 31. For obvious reasons which I’ll explain, UNH stock hasn’t had a good year to date. It’s down over 6%, well behind the 17.5% gain by the S&P 500.
UnitedHealth has two distinct businesses: The first provides healthcare plans for a company’s employees. That’s UnitedHealth. The second, known as Optum, provides health services to individuals, many of them having UnitedHealth healthcare benefits.
As the Democratic candidates have come out of the woodwork in 2019, many of them have called for some form of universal healthcare in the U.S., some even suggesting following a single-payer system like the kind found in Canada.
The idea of implementing a socialist healthcare plan scared investors. As they wondered whether an entire half of UnitedHealth’s business would be wiped out under such a scenario, UNH stock’s become kryptonite.
However, as I stated in my April 18 article about UNH, investors should consider buying its stock near 52-week lows because investor fears are likely overblown. Since then, it’s up 6% through May 1.
As healthcare stocks go, UNH is as stable as they come.
Intuitive Surgical (ISRG)
Of all the healthcare stocks in the fund’s top 25 holdings, Intuitive Surgical (NASDAQ:ISRG) is probably the healthcare stock I’m most familiar. The second-largest holding in PRHSX, it has a weighting of 5.5%. Like UNH, ISRG hasn’t exactly lit up the scoreboard in 2019. It’s up 6% year to date.
I first recommended ISRG stock in March 2013. Intuitive Surgical’s stock price was under pressure due to lawsuits it faced over the company’s da Vinci surgical systems. It got so severe that the FDA was looking into whether robotics was a threat to patient safety. As a result, ISRG was down 8.4% over 52 weeks, while the S&P 500 was up 25%, putting shareholders in a very grumpy mood.
Here’s what I said about its stock at that time:
“Intuitive Surgical is a great company that is growing free cash flow at a significant rate. If you own shares already, I’d applaud any pullbacks in its stock. If you don’t own any shares, buy some now and then some later if it drops some more. If you don’t, you’ll be kicking yourself in five years when it’s a $1,000 stock.”
Well, hyperbole aside, it’s still an outstanding healthcare stock to own, even at half the price.
I don’t know which type of healthcare stock I have a harder time assessing: a big pharma play like Pfizer (NYSE:PFE) or a small biotech stock like Mustang Bio (NASDAQ:BIO). Not being a science guy, the jargon gets a bit tricky.
The seventh-largest holding in the fund with a weighting of 2.9%, I picked Pfizer because it’s recently added 1.2 million shares, increasing its shareholdings by 16%, the largest addition by shares in the top 25.
Clearly, portfolio manager Ziad Bakri sees some serious capital appreciation in its future. I know InvestorPlace’s own James Brumley thinks highly of Pfizer’s drug pipeline.
“Though the headlines and sentiment seem dire, that pessimism is largely rooted in investors’ collective view that sees a glass as half-empty rather than half-full,” Brumley wrote in April. “Pfizer’s got a quietly potent pipeline, though, with a mix of already-approved and new drugs closer to wrapping up clinical trials than many investors might realize.”
Translation: Pfizer should not be in negative territory given the strength of its portfolio of drugs combined with the momentum in the overall markets.
At a 14x price-to-earnings ratio, it’s trading at a valuation well below its historical norm.
Of all seven of these healthcare stocks to buy, Roche (OTCMKTS:RHHBY) appears to be the only new position in the fund’s top 25 holdings with an initial 664,009 shares bought.
Why did Bakri buy into the Swiss pharmaceutical company? That I couldn’t tell you. What I do know is that the company is optimistic about 2019.
On April 17, Roche upped its outlook for the year due to higher sales expectations in both China and the U.S. This despite downward pricing pressure from President Trump.
At the end of 2018, Roche projected its sales growth this year would be low-to-mid-single digits. In its Q1 2019 earnings release April 17, it said it now expects sales to grow by at least mid-single digits with core earnings rising by a similar amount.
“We haven’t taken any price increases in the U.S. since July 1,” Bill Anderson, head of the Roche’s drugs division, said on its conference call. “Overall in the world, our 10 percent sales growth in pharma was based on 15 percent volume growth and 5 percent average price declines across the portfolio.”
Thanks to the company’s newer cancer drugs like Tecentriq, it continues to deliver growth for shareholders.
Vertex Pharmaceuticals (VRTX)
Although Vertex Pharmaceuticals (NASDAQ:VRTX) is best known for its cystic fibrosis drugs Kalydeco, Orkambi, and Symdeko, with 37,000 patients currently eligible to use them, it’s also focusing on transformative medicines beyond cystic fibrosis for kidney disease, neuropathic pain and others.
Of the 37,000 potential patients, about half are receiving treatment at the moment. By treating younger patients, it hopes to get that number up to 44,000, and using a triple combination regimen, it has its sight on 68,000 patients worldwide.
Accomplishing this goal takes cash flow. To that end, Vertex has grown its operating cash flow over the past three years by 448% to $1.27 billion. That’s starting from -$365 million in operating cash flow at the end of 2015. As a result, it’s added $2.2 billion in cash to its balance sheet.
From negative cash flow just three years ago, its free cash flow is now higher than $1.1 billion. In the first quarter ended March 31, Vertex increased free cash flow by 38% year over year to $307 million.
Up just 8% year to date, the next eight months look ready to deliver a higher share price.
Thermo Fisher Scientific (TMO)
Of the top ten holdings in PRHSX, Thermo Fisher Scientific (NYSE:TMO) has the second-best total return year to date, up 24%. Only Sage Therapeutics (NASDAQ:SAGE) has a better return.
The fifth-largest holding in the fund portfolio, Thermo Fisher Scientific is a big buyer of its stock. Last September it announced a $2 billion share repurchase program. On May 2, it announced its first-quarter earnings report. While the 10-Q’s not out yet, it did say it repurchased $750 million of its stock during the first quarter ended March 30 and increased its quarterly dividend by 12%.
InvestorPlace contributor Josh Enomoto summed up why TMO is such a great stock.
“If you think about it, Thermo Fisher stands on an almost unassailable position. The biotech sector will never stop searching for the next big therapy,” Josh stated last September while discussing the company’s big buyback. “Of course, not all contenders are successful. But TMO doesn’t have to be: they provide the equipment necessary for other companies to do their work.”
Why try to pick the next great biotech stock when you can own TMO and win no matter who it turns out to be?
HCA Healthcare (HCA)
Not a large holding in T. Rowe Price’s health sciences fund at a weighting of 1.9% (16th position), HCA Healthcare (NYSE:HCA) was first bought in 2011, so it’s one of the fund’s long-time holdings.
HCA stock took a beating in April due to the Medicare-for-All scare that hurt many of the big healthcare stocks. It dropped 10%, its worst single-day performance since Trump’s election victory in November 2016.
However, the owner of 185 hospitals and 119 freestanding surgery centers in 21 states, has seen its stock recover most of those losses over the subsequent 7-10 days.
“The market is ascribing an inordinately high probability that some form of Medicare-for-All proposal could become reality,” Cowen analyst Charles Rhyee wrote in a note in April. “In our view, Medicare-for-All fails the Occam’s razor test.”
For those who aren’t Latin scholars, it means other, more straightforward options will likely be used to reform the healthcare system.
Americans, especially Republican politicians, are so afraid of socialism, there’s no way Medicare-for-All gets passed into legislation.
As the population continues to age, hospitals will continue to experience significant demand, making HCA an excellent long-term buy.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.