Healthcare stocks have fallen somewhat out of favor, as tech and faster growing industries have lead the rally in equities this year. There is a prevailing notion that healthcare stocks are defensive, given their business models and the dividends they pay to their shareholders. However, there are standouts in the sector that are poised to deliver growth, spurred by new approvals and new markets.
For those looking for a diversified approach to investing in healthcare stocks, Health Care SPDR (NYSEARCA:XLV) and iShares Dow Jones US Healthcare (NYSEARCA:IYH) are good options that are relatively liquid. The two funds track each other very closely, though there is a slight difference between their yields. XLV yields 1.6%, while IYH has a slightly higher yield of 1.9%.
For investors looking to bet on individual stocks, Merck & Co (NYSE:MRK) and AbbVie I(NYSE:ABBV) look like particularly good options. Within the XLV fund, MRK stock makes up 6% of overall holdings and ABBV stock accounts for 3.5% of its assets.
MRK stock and ABBV stock are primed to bounce back after both dropped slightly recently. Their performance should help offset any potential weakness of the fund’s other holdings, including Johnson & Johnson (NYSE:JNJ).
JNJ stock is by far XLV’s largest holding, comprising over 11% of its total assets. Though I have concerns about the legal risks facing JNJ stock, the benefit of owning the index is that its diversification reduces the risk posed by each stock.
Healthcare Stocks to Buy: MRK
Merck demonstrated its ability to execute on its global strategy in the first quarter, generating double-digit percentage sales and earnings per share growth, no small feat, considering that the market cap of MRK stock is over $200 billion. MRK’s investments in research and development are clearly paying off, and the owners of MRK stock should be very positive about the company’s 2019 outlook.
The company’s China business generated a large part of its growth, driven by high sales of its oncology drugs and vaccines there. Excluding the negative impact of currency fluctuations, its China sales soared 67% year-over-year. China is a huge market with significant demand, but it’s not an easy nut to crack. Many multinational corporations spanning various industries have struggled to generate profits there. Merck’s ability to drive sales in China bodes well for its future growth and for MRK stock.
On the oncology front, the FDA’s approval of MRK’s Keytruda for a number of indications, including advanced renal cell carcinoma and melanoma with lymph nodes, was a big win for MRK stock. The EU also approved Keytruda in combination with chemotherapy. Sales of Keytruda were up 55% year-over-year in Q1.
Expect further approvals of MRK’s oncology drugs throughout the year to provide a boost to MRK stock. A number of the company’s animal-health treatments could also be approved.
Healthcare Stocks to Buy: ABBV
ABBV stock hasn’t maintained as much upward momentum as I would have expected after it reported very solid Q1 results. This global pharmaceutical company focuses on four therapeutic areas: immunology, oncology, virology and neuroscience. ABBV is a healthcare stock that has a lot of potential, given the strength of the company’s pipeline.
ABBV’s quarterly sales and earnings both beat expectations, leading ABBV to increase its full-year EPS guidance from $7.26 to $7.36. Most importantly, the company’s pipeline advanced meaningfully. Notably, the FDAand the Japanese Ministry of Health, Labour and Welfare both approved the company’s SKYRIZI treatment, which could improve the standard of care of psoriasis.
Those were big wins in a therapeutic area with a great deal of long-term potential. ABBV has multiple other products making their way through the approval process, setting the stage for ABBV stock to benefit from multiple positive catalysts in the near future.
In oncology, AbbVie announced a strategic partnership with Teneobio, a biotechnology company that’s developing a new class of biologics for the treatment of cancer, autoimmunity and infectious diseases. The two companies have agreed to develop and commercialize a biologic calledTNB-383B for the potential treatment of multiple myeloma.
ABBV’ has several other ongoing collaborations that will expand its oncology research platform, enabling it to develop life-changing treatments andmeaningfully boost ABBV stock.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.