If I had to build a medium to long-term portfolio, it would be incomplete without healthcare stocks. The novel coronavirus is not the reason for this view. Demographics in the United States point to sustained growth in the healthcare sector in the coming decade.
To put things into perspective, “U.S. healthcare spending is projected to grow by an annual average rate of 5.4% between 2019 and 2028.”
Further, “the expenditures on products and services ranging from medicines to hospital care are projected to climb from approximately $3.6 trillion in 2018 to almost $6.2 trillion by 2028.”
Given these projections, investors should not miss out on having one or more healthcare stocks in the portfolio. Sustained industry growth will imply value creation in the form of stock upside and dividends from healthcare stocks.
This column will talk about four healthcare stocks that can potentially take care of the portfolio’s health:
- CVS Health Corporation (NYSE:CVS)
- Teladoc Health (NYSE:TDOC)
- Moderna (NASDAQ:MRNA)
- Johnson & Johnson (NYSE:JNJ)
4 Healthcare Stocks: CVS Health Corporation (CVS)
I believe that CVS stock is among the top healthcare stocks to consider. There are several reasons for this view.
CVS stock trades at a price-to-earnings-ratio of 8.9. In addition, the stock has a dividend yield of 3%. Attractive valuations coupled with healthy dividends is a key reason to be positive on CVS stock.
CVS Health Corporation has been focused on de-leveraging. For the most recent quarter, net debt declined by $4.75 billion. Further, the company expects to reduce leverage to 3x by fiscal year 2022. With strong operating cash flows, I believe that dividends will increase as the balance sheet improves.
The company reported strong growth in the healthcare benefits segment from membership growth in Medicare and Medicaid insured products. Given the demographics, this segment is likely to deliver sustained growth.
The retail pharmacy segment also delivered healthy same-store sales growth. The company has also been diversifying its services. As an example, the company’s Next Gen Diabetes Management program is designed to improve the health of people living with diabetes. Similarly, Virtual Care has also gained popularity.
Overall, the company’s effort is focused on reducing debt and expanding services. In the coming years, growth is likely to be stable. Given the valuations, CVS stock is worth considering.
Teladoc Health (TDOC)
In the last year, TDOC stock surged 158%. I believe that a correction would be a good opportunity to accumulate the stock.
Teladoc Health is a virtual care provider and the pandemic accelerated the company’s growth. To put things into perspective, Teladoc reported revenue of $553 million for the last year. At mid-point of the guidance, revenue is likely at $988 million for the current year.
It’s important to note that the company has a client retention rate of more than 90%. The company reported operating cash flow of $61 million for the first nine months of 2020. For the same period last year, OCF was $12 million. As paid membership continues to grow, cash flow will swell. I must also mention that the company’s growth is not limited to the pandemic period.
The telehealth market in the United States is expected to grow seven fold by FY2025. This would imply a CAGR of 38.2%. McKinsey also believes that about $250 billion of the U.S. healthcare spend could potentially be virtualized.
Given these estimates, the best part of growth is still to come for Teladoc Health. I am therefore bullish on TDOC stock and fresh exposure can be considered on corrections.
Moderna (MRNA)
MRNA stock has remained in limelight through the coronavirus pandemic. Recently, the company announced that its vaccine against Covid-19 is 95% effective.
This triggered a strong rally in the stock. MRNA stock is already higher by 400% for year-to-date FY2020. However, I believe that further upside is due in the coming months.
It’s expected that the European Union will approve Moderna’s vaccine in December 2020. This can trigger another rally. Moderna reached agreements with the United States, Japan, Qatar and the United Kingdom. Once the company receives regulatory approvals, the vaccine will deliver robust top-line growth and cash flows.
Interim trials conducted by AstraZeneca (NASDAQ:AZN) indicate that the company’s vaccine is 70% effective against Covid-19. This is good news for Moderna and Pfizer (NYSE:PFE).
Besides the Covid-19 vaccine prospects, the company has a deep pipeline of vaccines and drugs. The company’s strategic partners include the likes of Merck (NYSE:MRK) and AstraZeneca. Therefore, there are reasons to be bullish on MRNA stock beyond the Covid-19 vaccine.
Johnson & Johnson (JNJ)
I believe that JNJ is a core portfolio stock with a diversified portfolio of products. The broad market valuations look stretched. This is another reason to consider JNJ stock for the portfolio. The stock has a low beta of 0.69 and an attractive dividend yield of 2.76%.
From a business perspective, the company provides diversified exposure to the segments of consumer health, pharmaceuticals and medical devices. The company’s pharmaceutical segment growth for Q3 2020 was impressive with most therapeutic areas delivering strong numbers.
However, the consumer health and medical devices segment was negatively impacted due to Covid-19. This is likely to change in the coming quarters. I also like Johnson & Johnson as the company has a strong presence and growth potential in emerging markets.
The company’s vaccine against Covid-19 is also in Phase 3 trial. A positive outcome on that front can be another stock upside trigger. Even from a valuation perspective, JNJ stock is trading at an attractive forward P/E of 18.3. This is another reason to consider the stock.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
