The pandemic has made healthcare an incredibly important issue for billions of global citizens. The presidential election has put further domestic focus on the sector, too. In most election years, healthcare reform becomes a major subject of debate. Therefore, today’s article looks at seven healthcare stocks that can survive massive reform.
According to research by Jonathan Hartley of the University of Chicago, such reforms have “major consequences for American consumers, taxpayers, and health care firms.” Understandably, share price of publicly-listed companies also get affected.
Numbers from the U.S. Centers For Medicare & Medicaid Services show “health care spending grew 4.6 percent in 2018, reaching $3.6 trillion or $11,172 per person.” The U.S. allocates about 18% of its gross domestic product (GDP) on health care.
When looking at healthcare stocks, market participants typically compare returns on several exchange-traded funds (ETFs) to the S&P 500 index, which is up about 1% so far in 2020. For instance, the Health Care Select Sector SPDR ETF (NYSEARCA:XLV) is down 0.2% year-to-date (YTD), compared with the SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH), which has decreased by 3.4%.
Given all the volatility and the headlines in 2020, it could feel difficult to draw a bead on broader markets as well as healthcare stocks right now. But proper due diligence always helps in finding stocks that could become long-term winners. With that in mind, here are seven healthcare stocks that are likely to do well in the quarters ahead regardless of how reforms may develop.
- Allscripts Healthcare Solutions (NASDAQ:MDRX)
- Bristol-Myers Squibb (NYSE:BMY)
- CVS Health (NYSE:CVS)
- Intuitive Surgical (NASDAQ:ISRG)
- Smith & Nephew (NYSE:SNN)
- Teladoc Health (NYSE:TDOC)
- Zoetis (NYSE:ZTS)
Healthcare Stocks: Allscripts Healthcare Solutions (MDRX)
52-Week Range: $4.56 – $11.82
The first of our healthcare stocks is the Chicago, Illinois-based healthcare information technology group Allscripts Healthcare Solutions. It provides software to hospitals and outpatient facilities that collect, manage and analyze patient data.
On Oct. 29, the company released its third-quarter earnings. Revenue came at $402 million. A year ago it had been $444 million. GAAP net income was $1 million, compared with net loss of $6 million in Q3 2019. Despite the drop in sales, this improvement is a significant step for the business.
The company also generated $53 million of operating cash flow and $27 million of free cash flow. Allscripts has recently announced the sale of its CarePort Health operating unit for $1.35 billion. The proceeds are expected to help the group pay off debt, buy back shares and concentrate on the core business.
CEO Paul Black cited, “I am pleased with our execution even as the typically seasonally weaker third quarter was impacted by challenges related to the ongoing pandemic. Our successful margin improvement initiatives delivered increased earnings and cash flow in this uncertain environment.”
YTD, MDRX stock is up about 2.7%. Forward price-earnings and price-sales ratios stand at 14.10 and 0.96. And healthcare records and data business in the U.S. is likely to grow in the coming quarters. With the cash coming from the sale of CarePort, management has a better opportunity to drive long-term revenue and earnings growth.
Bristol-Myers Squibb (BMY)
52-Week Range: $45.76 – $68.34
Dividend yield: 3.08%
Global biopharmaceutical company Bristol-Myers Squibb needs little introduction. It focuses on cardiovascular, oncology and immunology medicines and has invested significant sums into research and development (R&D). In 2019, three drugs accounted for about three-fourths of total sales.
They are Eliquis, which is used to reduce the risk of stroke and blood clots; Opdivo, which is prescribed in advanced stage lung cancer; and Orencia for treating symptoms of rheumatoid arthritis.
In November 2019, Bristol-Myers Squibb acquired the major biotech firm Celgene. Revenue contributions from that transaction helped Q2 revenue to go up by 61% YoY. Covid-19-related challenges have affected BMY’s financial metrics earlier in the year. However, thanks to its robust pipeline, analysts expect the group to be on track for strong long-term cash flow generation and growth.
So far in the year, BMY stock is down 8%. Forward P/E and P/S ratios are 7.64 and 3.35, respectively. The company will release Q3 results on Nov. 5. Potential investors should ideally analyze the data before committing capital into the business. A short-term decline toward $55 would improve the risk/return profile. Long-term shareholders would also be entitled to juicy dividends, which are significant in times of rock-bottom interest rates.
CVS Health (CVS)
52-Week Range: $52.04 – $77.03
Dividend Yield: 3.57%
Our next stock is the Woonsocket, Rhode Island-headquartered CVS Health, the largest pharmacy healthcare provider in the U.S. The company released Q2 earnings in early August. Total revenue came at $65.3 billion, an increase of 3.0% YoY.
Adjusted operating income went up by 32.2% to reach $5.3 billion. Adjusted EPS was $2.64. Cash flow from operations was $10.4 billion. At the time, investors paid attention to three segments:
- Pharmacy Services (over 46% of sales);
- Retail/LTC (over 29% of sales);
- Health Care Benefits (about 25% of sales).
Management noted that despite the challenges posed by the pandemic, total revenue increase was driven by growth across all segments. The company’s ecosystem is also increasing, meaning its engagement with customers is growing. Currently, CVS Health has about
- 10,000 retail location across the country;
- 1,100 Minute Clinic locations (which have seen over 54 million visits);
- 23 million medical benefits members;
YTD, CVS stock is down about 24%. Forward P/E and P/S ratios are 7.4 and 0.28, respectively. The company will announce Q3 earnings on Nov. 6. As an another earnings season continues, markets are choppy. How global health developments regarding the second wave of the coronavirus will play out is unknown.
However, in the long-term CVS stock should benefit from the group’s leadership position as well as sizable market share in the retail drug industry stateside.
Intuitive Surgical (ISRG)
52-Week Range: $360.50 – $778.83
The pioneer of computerized and robotic-assisted surgery Intuitive Surgical is a global leader in minimally-invasive surgical products. The “da Vinci surgical system” and the “Ion endoluminal system” are preferred by medical professionals worldwide.
On Oct. 15, ISRG released Q3 results. The company suffered from the adverse effects of the pandemic as elective surgeries were down globally. Many hospitals also put off their capital equipment purchases. As a result, Intuitive Surgical shipped 195 da Vinci Surgical Systems, a 29% decline YoY.
Revenue was $1,078 million, a decrease of 4% YoY. GAAP net income of $314 million translated into $2.60 per diluted share. A year ago, the numbers had been $397 million in net income, or $3.33 per diluted share.
Since the start of the year, the shares have increased by 12%. Forward P/E and P/S ratios stand at 50.51 and 18.48, respectively. The share price could potentially decline toward the $600 level, offering investors a better entry point.
While the second wave of the pandemic continues, many hospital are likely to divert “resources to meet the increasing demands of responding to and managing COVID-19.” Yet, due to the company’s competitive and technological dominance in this niche market, we expect the company to ride this wave of the pandemic with little damage to operations.
Smith & Nephew (SNN)
52-Week Range: $26.07 – $52.26
Dividend Yield: 1.6%
Our next healthcare stock comes from the other side of the Atlantic. It is the U.K.-based Smith & Nephew, a prominent producer of medical supplies. SNN is a member of U.K.’s FTSE 100 index and the shares are traded in both London and New York.
The group’s global reach extends to more than 100 countries. It’s well respected for its hip and knee implants and sports medicine, as well as products for trauma and extremities and advanced wound management. Smith & Nephew has manufacturing facilities around the world, including the U.K., U.S., Germany and Canada, among others.
On Oct. 29, the company released its Q3 results. Revenue of $1.2 billion meant a decline of 4.2% YoY. However, it was still a significant recovery from Q2, which has declined over 29% YoY. The U.S. market returned to growth and was up 0.9%.
The company is acquiring the Extremity Orthopaedics business of New Jersey-based Integra Lifesciences (NASDAQ:IART) for $240 million. Thus, its portfolio in higher-growth extremities segment will be expanding.
CEO Roland Diggelmann said, “We were well prepared as global levels of elective surgery recovered and delivered a substantial improvement in performance over the previous quarter, led by growth in both the US and China, our two largest markets. … We launched multiple new innovative products and announced an acquisition that will strengthen our position in the rapidly growing extremities segment.”
YTD, Smith & Nephew shares are down 27%. Forward P/E and P/S ratios are 16.84 and 3.28. Passive income seekers may be interested to know it has paid regular dividends to shareholders since 1937.
Teladoc Health (TDOC)
52-Week Range: $75.20 – $253.00
Provider of virtual healthcare services Teladoc Health has been one of the stars of 2020. Through phone and online video consultations, its platform gives access to physicians for non-emergency medical issues. For instance, it covers clinical conditions, including episodic care, chronic, and even complicated cases. The New York state-based company serves both businesses and individuals.
It has recently completed the merger with Mountain View, California-based medical technology group Livongo Health that specializes in diabetes management.
On Oct. 28, Teladoc released Q3 metrics. Revenue of $288.8 million meant growth of 109% YoY. The platform saw total visits of 2.8 million, an increase of 206%. Net loss of $35.9 million translated into net loss per basic and diluted share of 43 cents. A year ago, the numbers had been net loss of $20.3 million and net loss per share of 28 cents. Management increased full year guidance and now expects revenue to come slightly over $1 billion.
CEO Jason Gorevic said, “Our strong third quarter results exceeded expectations, driven by broad-based strength across the business and building on the momentum we saw in the first half of the year. … With the addition of Livongo later this year, we will be creating a new category of whole person virtual care that will transform how people live healthier lives.”
YTD, TDOC shares are up around 130%. We expect the company to show sustained growth in the coming quarters. Prospective investors may consider buying the dips, especially if there is a price decline below $175. The sector is nascent and growing.
Healthcare stocks: Zoetis (ZTS)
52-Week Range: $90.14 – $168.96
Dividend Yield: 0.5%
As we look at healthcare stocks, it would be appropriate to discuss a stock that specializes in the well-being of animals, including our much-loved pets. New Jersey-based Zoetis develops and manufactures animal vaccines, medicines, and diagnostics. Its customers include veterinarians and livestock producers.
The company focuses on “eight core animal species. [Its] farm animal products and services are dedicated to cattle, fish, poultry, sheep and pigs, and [its] companion animal offerings cater to cats, dogs and horses.” The veterinary products are sold in over 100 countries.
In 2019, annual revenue was $6.3 billion. In early August, Zoetis released Q2 results and reported “Flat Revenue of $1.5 Billion, and Net Income of $377 Million, or $0.79 per Diluted Share, Increasing 2% and 3%, Respectively, on a Reported Basis for Second Quarter 2020.”
Management highlighted the adverse impact of the pandemic and foreign currency headwinds. However, CEO Kristin Peck sounded optimistic for the future and said, “we expect our overall revenue growth for the remainder of the year to be driven largely by companion animal products, especially parasiticides and our key dermatology portfolio, and we are raising our guidance to reflect our current outlook for the year.”
Since the start of the year, ZTS stock is up close to 23% and hit an all-time high in October. Forward P/E and P/S stand at 39.22 and 12.29. We believe the current valuation is stretched. Therefore, potential investor may wait for a pullback in price before putting new capital into the firm. A potential decline toward the $140 level would improve the margin of safety.
Given its attractive product diversity and geographic reach, we expect the company’s leadership to continue, which would support the share price.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.