With the novel coronavirus pandemic, many healthcare stocks came under pressure last year. This was especially the case for those organizations that provided discretionary procedures or therapies.
And while things should get much better this year, the industry is facing something else: a change in federal leadership. The Biden Administration is likely to be more focused on lowering costs.
Yet the overall impact may still be muted. Biden has a long history as a moderate who has worked across the aisles. He also only has a razor-thin control of the Senate.
Besides, there are many standout companies in the healthcare sector. Some of these also pay attractive dividends.
So which healthcare stocks look compelling right now? Let’s consider seven:
- Pfizer (NYSE:PFE)
- Cerner (NASDAQ:CERN)
- Merck (NYSE:MRK)
- Amgen (NASDAQ:AMGN)
- UnitedHealth Group (NYSE:UNH)
- Stryker (NYSE:SYK)
- Health Care Select Sector SPDR ETF (NYSEARCA:XLV)
Healthcare Stocks: Pfizer (PFE)
Pfizer’s development of its Covid-19 vaccine — which was done in collaboration of BioNTech SE (NASDAQ:BNTX) — was one of the greatest feats in medicine. The company leveraged cutting-edge messenger RNA (mRNA) to essentially simulate the virus, allowing a patient’s own immune system to develop antibodies against it.
It’s unclear how much money this vaccine will generate for PFE stock. But it could be over $10 billion in the next few years. What’s more, the experience with mRNA could lead to other treatments, such as treatments for cancer.
In the meantime, PFE is in the midst of a rebranding (there is a new logo) and rethinking of its overall strategy. It’s all part of being much more focused on prescription drugs and vaccines (as seen with the spinoff of the Upjohn division and the consumer health businesses like Advil). This segment not only has premium pricing but large market opportunities.
With rising cash flows, the company will be able to continue its dealmaking for biotechs so as to bolster the pipeline. There will also likely be continued growth in the dividend. Note that the current yield is an attractive 4.2%.
Healthcare has been a laggard with the adoption of new technologies. But this should not be a surprise. There are challenges with legacy system as well as stringent regulatory requirements.
However, the healthcare industry will need to get more aggressive. After all, there will be increased pressures on costs.
There are many tech startups looking to benefit from this opportunity. But the advantage may actually be with more established firms, as they have deep experience with integrating complex systems.
One of the top players in the category is Cerner, which was founded more than 40 years ago. The company develops IT systems that manage some of the world’s largest health organization. Cerner also has over 500 patents on its technologies.
Consider that the company has been modernizing its applications by moving to the cloud. At the heart of this is the HealtheIntent platform. It is a sophisticated network for handling claims and payer vendors. In other words, it’s a play to greatly enhance the overall efficiency.
As for CERN stock, the valuation is reasonable, given that the company has mission-critical software that provides for substantial recurring revenues. The current forward price-to-earnings multiple is 23X.
Last year, Merck had the distinction of being one of the worst stocks on the Dow Jones Industrial Average. The loss was 6% or so.
For example, the company has been late with its Covid-19 vaccine. Merck had to play catchup by making several acquisitions.
But as for 2021, things should be better. So what will be the catalysts for growth? First of all, Merck has the benefit of Keytruda, which is targeted at lung cancer. It is on pace to exceed $20 billion in revenues by 2025.
Next, the company has a large pipeline of drug candidates, such as for respiratory infections and heart failure. There will also be efforts to refocus the business on prescription drugs. For example, there are plans to unload the businesses for women’s health.
If anything, MRK stock does look like an interesting value opportunity among healthcare stocks. Keep in mind that the dividend is 3.2% and the forward price-to-earnings ratio is 12.7X.
Last year, Amgen stock was included in the venerable Dow Jones Industrial Average. This was a testament of how important the biotech industry has become.
Founded in 1980, Amgen is one of the pioneers of this category. While the early years were challenging, the company’s R&D efforts would pay off in a big way in the 1990s. Since then, Amgen has continued to grow. In the most recent quarter, the revenues increased by 12% to $6.4 billion and earnings per share rose by 19% to $4.37.
The company’s drugs cover a wide array of segments, such as bone health, oncology, inflammation, heart disease and neuroscience. Note that six drugs generate over $500 million a year.
The pipeline is also robust and should be a nice source of growth. In fact, there are more than 150 clinical trials for various drug candidates.
As for AMGN stock, the valuation is reasonable with a P/E of 13.8X and a 2.9% dividend yield.
UnitedHealth Group (UNH)
The Covid-19 pandemic has had a mixed impact on the U.S. health insurance market. On the negative side, there has been a reduction in the pool of employees to pay premiums as well as unexpected costs. But on the other hand, there has been less demand for elective procedures.
But as the vaccines roll out this year, things will likely normalize. And this will be good news for insurers, especially the larger ones that have massive scale.
One of the best positioned is UnitedHealth Group. In the third quarter, the revenues increased by nearly 8% to $65.12 billion and the earnings came to $3.17 billion.
A key to the success of the company is its diversified platform. For the health benefits category for employers and individuals, there are about 26.4 million members. Then there is the lucrative Medicare and Retirement business, which covers one in five in the U.S. And UnitedHealth also owns Optum, which is a successful information technology unit that helps install systems to achieve better outcomes and lower costs.
As for UNH stock, the valuation is at attractive levels, with the price-to-earnings ratio at 17X and the dividend yield at 1.4%.
Stryker is a leading developer of medical devices and robotic systems for orthopedic and spinal procedures. While the Covid-19 pandemic has weighed on business, the company has still been able to post low single digit growth. But as things start to improve this year, Stryker should get back into growth mode.
Consider that the long-term trends are quite positive. After all, there is the aging of the population, especially with large groups like the Baby Boomers. Then there is the increasing use of automation technologies in healthcare.
At the heart of Stryker is its Mako robotic platform, which has recently exceeded 1,000 installs. This system helps with hip and knee replacements.
The valuation SYK may seem on the high side, with the forward price-to-earnings ratio at 27X. But then again, the earnings have been temporarily depressed. Besides, in light of the potential growth prospects and strong product line, a premium is warranted.
Health Care Select Sector SPDR ETF (XLV)
Even when investing in large healthcare stocks, the risks can be considerable. Just one bad decision with the Food and Drug Administration (FDA) can have a big impact on the stock.
So one way to help reduce this risk is to invest in an exchange-traded fund. And a good choice is the Health Care Select Sector SPDR ETF, which has $26 billion under management.
The XLV tracks the healthcare segment of the S&P 500, which means that the companies tend to be larger in market value. They also range across the different parts of the industry like pharmaceuticals, equipment/supplies, services and technology. Some of the top holdings include Johnson & Johnson (NYSE:JNJ), Abbot Labs (NYSE:ABT), Merck and Eli Lilly (NYSE:LLY). There are currently 63 securities in the portfolio.
The XLV ETF has a small expense ratio of 0.13%, or $13 annually per $10,000 invested, and the dividend yield of 1.5%.
On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the author of courses on topics like the Python language and COBOL.