Editor’s note: “The Top 7 Healthcare Stocks You Should Be Watching” was previously published in June 2020. It has since been updated to include the most relevant information available.
Over the past decade healthcare stocks have been the third-best performing sector out of the S&P 500. They trail only information technology and consumer discretionary when you look at each sector’s specific exchange-traded fund. The S&P Healthcare ETF (NYSEARCA:XLV) has returned 15.6% annualized over the past decade, beating the overall S&P 500’s 13% by a healthy margin.
Healthcare’s status has improved dramatically over the past six months. At the end of 2019, the healthcare sector feared a potential threat as Bernie Sanders had potential as the Democratic nominee for the 2020 election. Sanders debated outlawing private health insurance.
Now, however, with Sanders and other supportive nominees out of the picture, talks of eliminating private healthcare are gone, at least until 2024. Meanwhile, the novel coronavirus has utterly upended pre-existing notions around the current healthcare system.
It has become painfully clear that we will need far more investment and modernization in the space. This crisis has shaken the country, and politicians and industry leaders will be spending heavily to avoid similar tragedies in the future. As a result, it’s time to load up on the best healthcare stocks out there. Here are seven to have on your radar now:
- Apple (NASDAQ:AAPL)
- Teladoc (NYSE:TDOC)
- Novo Nordisk (NYSE:NVO)
- Stryker (NYSE:SYK)
- Johnson & Johnson (NYSE:JNJ)
- Ventas (NYSE:VTR)
- HCA Healthcare (NYSE:HCA)
Let’s look at what makes each a solid healthcare stock to consider buying now.
Healthcare Stocks to Buy: Apple (AAPL)
Apple probably isn’t the first thing that you think of when considering healthcare stocks. However, it has made increasing moves in that direction in recent years. And the coronavirus will push Apple further into the wellness space. That’s because Apple has partnered with Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) on a contact-tracing application that could help monitor and slow the spread of the virus.
This is a natural outgrowth of Apple’s smart watch and integrated apps ecosystem, which can passively collect and analyze all sorts of health data.
However, it also comes with severe privacy concerns. InvestorPlace spoke via e-mail with David Hoffman, who is a professor at Duke’s Sanford School of Public Policy. Hoffman told us that:
“As individual states move toward implementing their own contact tracing applications, they are working with different private sector companies and technology platforms. Those technology companies provide varying degrees of privacy protections. The lack of understanding individuals will have on how their health data will be used brings into focus the need for a federal baseline of privacy protections.
Congress has been considering federal privacy legislation for the past two years with several credible proposals advancing in the key committees. The use of personal health data to combat COVID-19 should be the issue that finally pushes Congress to enact a federal privacy law.”
Contract tracing could be a huge test case for Apple’s broader healthcare ambitions. Will Congress and the general public put health needs first, or will Orwellian surveillance concerns carry the day? The decision will have a big impact on Apple and other big tech companies that can use their data to improve health outcomes.
Apple isn’t the only tech company navigating the privacy issues that Mr. Hoffman raised. There’s also Teladoc, which has become the clear leader in the telehealth space. The coronavirus has highlighted the need to offer digital and remote healthcare services, particularly during crises.
Teladoc was able to seize the moment, as it had already built a strong baseline product offering before the pandemic hit. As a result, shares have nearly quadrupled over the past year.
That said, some investors have grown nervous about what happens next. At some point, we’ll start to control the virus, and the immediate need for telemedicine will decline. However, as our Matt McCall argued, Teladoc is far more than just a coronavirus play.
The current pandemic is merely accelerating a shift toward digital medicine that would have happened anyway. In many cases, it’s either cheaper or easier for patients than the existing option. Do watch how privacy regulation evolves in this space. We’re likely to see a rewrite of much of existing law in a post-Covid-19 world as society adapts. These changes will have a decisive role in shaping Teladoc’s future.
Novo Nordisk (NVO)
Switching gears, another place to find the best healthcare stocks is in companies that are riding the demographic wave. What companies will be providing more care in a decade than they are today? Diabetes treatment leader Novo Nordisk immediately comes to mind.
Some investors may have the idea that Novo Nordisk is a static company. It primarily sells insulin and other related products to deal with diabetes and obesity. So how much does the product line-up truly change? In fact, however, the company is highly innovative.
It spends heavily on research and development, and has produced plenty as a result of that. Consider that more than 40% of Novo Nordisk’s U.S. revenues come from products launched in 2015 or later. The company is not just living off of past successes, nor is at risk of a major patent cliff.
As such, it’s in great position as demographics continue to play out. Diabetes and obesity are massive problems around the world, and they continue to trend upward as many developed nations get older. Novo’s stock has already doubled in recent years as investors wake up to this reality. And there could be plenty more upside over the next decade.
Speaking of demographics, Stryker is another company that is poised to benefit as the population ages.
Stryker makes all sorts of medical devices and equipment, however, it is particularly focused on orthopedic and spinal devices. These will have more and more demand as people look to add more quality years of life in their retirement.
SYK stock got hammered during the March crash and with some good reason. Many of the company’s products require hospital surgery. With the Covid-19 crisis, hospitals deferred a great deal of surgeries that weren’t time sensitive off into the future. This, of course, has greatly dampened Stryker’s near-term revenues and earnings outlook. The company has some offset for this as it makes some things, such as hospital beds, that saw an increase in demand.
Overall, however, the company is likely to report a weak 2020. It’s a buy on any dips though. Shares are up tenfold since 2000, as it rides its position as a leader in a quickly growing industry with strong intellectual property protection. That’s a recipe for a winning investment.
Johnson & Johnson (JNJ)
Focusing on profitable niches is great. There are a ton of healthcare specialties that are highly attractive. However, sometimes you want broad exposure.
You could buy an exchange-traded-fund, of course. But those have various drawbacks. If you want a diversified all-in-one healthcare stock, look no further than Johnson & Johnson.
JNJ is a household name — both for consumers and investors — because of its century-long commitment to excellence. The company has pioneered an unfathomable quantity of great products. And when it gets into trouble, such as with the famous Tylenol poisoning incident, it does the right thing to make the situation better, regardless of the cost.
Over a century of operations, as healthcare spending has expanded, JNJ has consistently earned its fair slice of the pie across medical devices, consumer products and pharmaceutical drugs.
As a result, it has grown its dividend for more than 50 years in a row thanks to its steadily rising profits. A lot of blue chip stocks have lost their luster in recent months. JNJ is not one of them. This giant among healthcare stocks is as trustworthy and dependable as ever.
If you want exposure to both healthcare stocks and dividends, Ventas could be the right pick for you. Ventas is a real estate investment trust focused on senior living facilities in the U.S. and a few other countries.
Unlike many other healthcare stocks, Ventas has suffered acutely due to the coronavirus. REITs in general have sold off, and investors have dumped healthcare ones in particular.
That’s because of concerns around liability if senior living operators allow the virus to infiltrate their centers. More broadly, there are short-term liquidity concerns as well given the sudden economic shock.
As a result, Ventas trimmed its dividend and is using excess cash to pay down debt. This should keep the company’s financial position strong while management lobbies the government to ensure that senior living facilities receive adequate support and regulatory protection from the current threat.
In the broader outlook, demand should continue to grow for Ventas’ facilities thanks to the aging of the population. With the virus’ impact, shares are now down by half. Even with the reduced dividend, VTR stock yields more than 5% at present. And the yield could go much higher if the old dividend is reinstated once the current crisis passes.
HCA Healthcare (HCA)
Like Ventas, hospital operator HCA is clearly in the deep value bucket at the moment. Shares are down sharply from recent highs. It’s not hard to see why. HCA is a highly levered company that currently has a junk credit rating. As such, investors dumped the stock as soon as the market troubles began.
Hospitals in particular have been vulnerable to the virus. That’s because many HCA facilities delayed elective surgery in order to save space for virus patients. However, those surgeries are where hospitals make the bulk of their profits. As such, HCA is likely to report soft earnings this year.
But investors’ worst fears — a liquidity crisis — seem to have passed. The government provided billions to the major hospital chains, including HCA, to assist them during the pandemic. And now, more normal earnings should start coming back in some of HCA’s hospitals. Meanwhile, shares are still trading at $99, down dramatically from their $150 level pre-Covid.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he owned JNJ, SYK and NVO stock.