The healthcare sector is a critical part of global gross domestic product (GDP) growth. Estimates suggest that global healthcare spending, as a percentage of GDP, is likely to remain around 10.3% through fiscal year 2023. Healthcare spending is also expected to grow at a compound annual growth rate (CAGR) of 4% over the next few years. Given the importance of the industry, it’s a good idea to buy and hold some quality healthcare stocks.
It’s also important to note that healthcare is relatively immune to economic shocks. In general, companies in the sector are low beta stocks. These are important reasons to buy and hold a few stocks from the sector.
If we look at the growth outlook for the next decade, the healthcare sector will continue to swell in size. A key reason is significantly low healthcare spending in emerging economies. As an example, healthcare spending per capita is likely to be $12,703 in the United States by FY2024. For the same year, the per capita healthcare spending in Pakistan is estimated at $37. Therefore, healthcare companies will have significant global opportunities in the coming decade.
Let’s talk about seven healthcare stocks to buy and hold:
- Teladoc Health (NYSE:TDOC)
- COMPASS Pathways (NASDAQ:CMPS)
- Thermo Fisher Scientific (NYSE:TMO)
- Pfizer (NYSE:PFE)
- ResMed Inc. (NYSE:RMD)
- Johnson & Johnson (NYSE:JNJ)
- Illumina (NASDAQ:ILMN)
Healthcare Stocks: Teladoc Health (TDOC)
After surging to an all-time high of $308, Teladoc Health stock has corrected sharply and currently trades at about $191. A key reason for the rapid sell-off is softer-than-anticipated guidance for the year. However, the long-term outlook is robust for the business. I see the correction as an opportunity to gradually accumulate TDOC stock.
For fiscal year 2020, Teladoc Health reported revenue of $1.1 billion, which was higher by 98% on a year-over-year basis. For the current year, the company is expecting revenue between $1.95 billion and $2 billion. Revenue growth is therefore likely to decelerate to approximately 80%. However, even this growth indicates strong industry tailwinds.
Further, for FY2020, the company reported adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $126.8 million. For the year, adjusted EBITDA is likely to increase to $255 to $275 million. It’s worth noting that paid members in the U.S. were 51.8 million as of December 2020. For the current year, paid membership is likely in the range of 52 to 54 million. As paid members increase, the EBITDA margin is likely to see strong growth in the coming years.
Overall, Teladoc has a big addressable market and the pandemic has accelerated growth in virtual healthcare. With strong growth and industry tailwinds, TDOC stock is one of the healthcare stocks to buy and hold for the long term.
COMPASS Pathways (CMPS)
Mental health is likely to be an increasingly important part of the overall healthcare system. It’s estimated that 264 million people globally are affected by depression. This makes CMPS stock worth considering for the long term.
COMPASS Pathways is a mental healthcare company that’s working toward evidence-based innovation. The company is currently developing a COMP360 psilocybin therapy for treatment-resistant depression (TRD). The Phase I trials have already been completed. Currently, Phase IIb is underway with 216 patients expected to have completed trials by the end of this year.
I must add that the long-term follow-up study of participants from Phase IIb will be completed only in FY2022. Therefore, the company is still a few years away from generating revenue. However, 100 million patients suffer from TRD globally. This is a big addressable market, and if trials deliver positive results, the stock is likely to surge.
In terms of liquidity, the company raised $146.6 million from its September 2020 initial public offering (IPO). This provides the company with ample liquidity for funding the clinical trials. Long-term investors can buy and hold CMPS stock at current levels of $41. Positive news from clinical trials will be key upside triggers in absence of any revenue in the medium term.
Thermo Fisher Scientific (TMO)
TMO stock is another attractive play in the healthcare sector. The stock currently trades around $450 and at an attractive price-to-earnings (P/E) ratio of 21.05. Considering the company’s growth, the stock is one to buy and hold for the next few years.
Thermo Fisher conducts business through various segments that include life-sciences solutions, analytical instruments, specialty diagnostics and laboratory products. For FY2020, the company reported revenue of $32.2 billion, with YoY growth of 26%. Earnings per share (EPS) growth for the same period was 58%. Considering the earnings growth, a P/E of 21.05 implies that the stock is undervalued.
It’s worth noting that the company generated more than $6 billion in Covid-19 response revenue last year. This segment will continue to drive growth in the coming quarters. Additionally, the company has high investments in research and development. There are several new product launches lined up for the year, which will continue to boost growth.
Thermo Fisher has continued to deliver strong free cash flows. With high financial flexibility, the company is pursuing inorganic growth. In February 2021, the company completed the acquisition of Mesa Biotech, a “point-of-care molecular diagnostic company.” In the same month, the company also acquired “cell sorting technology assets from Propel Labs.”
Thermo Fisher also increased quarterly dividends by 18% to 26 cents per share. Within an industry that’s immune to economic shocks, the company is well positioned to deliver strong cash flows and higher dividends in the coming years.
Among pharmaceutical stocks, PFE stock is worth buying at current levels. The stock trades at a P/E of 10.78 and has an attractive dividend yield of 4.5%. After trading flat for almost a year, I would not be surprised if PFE stock outperforms in the next few quarters. Even from a long-term perspective, it’s a buy-and-hold stock for your portfolio.
While the company’s stock has been depressed, the company’s financial performance remains strong. For the year, Pfizer is expecting to generate $15 billion in revenue from BNT162b2. The vaccine for Covid-19 will continue to contribute to top-line growth in the next few years.
Besides the vaccine, Pfizer has an attractive pipeline of drugs. Through FY2025, the company expects top-line growth of 6% as new vaccines and drugs boost growth. To elaborate, the company currently has 24 drugs in Phase 3 and 35 in Phase 2 trials. Furthermore, there are 27 drugs in Phase 1 trials. Therefore, Pfizer growth is not limited to the vaccine against Covid-19.
In the coming years, top-line growth will be associated with growth in cash flows. This positions the company for sustained value creation through dividends and share repurchase. In addition, the stock currently has an average analyst price target of $41.11. This would imply an upside of 18% from current levels of $34.80.
ResMed Inc. (RMD)
ResMed Inc. is another name among healthcare stocks to buy and hold for the next five years. I would classify RMD stock as a hidden gem with a potential to outperform in the sector.
ResMed is a provider of innovative solutions to treat people out of the hospital. The company’s cloud-connected medical device is used for conditions that include sleep apnea, chronic obstructive pulmonary disease (COPD) and other chronic diseases.
A key reason to be bullish on the company’s growth is a large addressable market. As an example, ResMed estimates that more than 380 million people globally suffer from COPD. Similarly, the company estimates that sleep apnea is 80% undiagnosed.
In addition, the company is also a provider of software-as-a-service, which contributed to 12% of the revenue in the last 12 months. The company’s revenue is also well diversified from a geographical perspective, with strong presence in the Americas and Europe.
I also like the fact that the stock offers an annual dividend of $1.56 per share. The company’s free cash flow has been trending higher, and it’s likely that dividends will grow in the next few years. It’s also worth noting that for FY2020, the company’s research and development expense was 7% of the revenue. Investment in research is likely to ensure strong top-line and earnings growth.
Johnson & Johnson (JNJ)
At a P/E of 16.75 and a dividend yield of 2.54%, JNJ stock is a must-have for your long-term picks of healthcare stocks. The stock has moved higher by 21% in the last one-year period, and it seems to me that a breakout on the upside is likely.
The company’s vaccine against Covid-19 has been approved by the U.S. Food and Drug Administration for emergency use. The U.S. will also be investing $100 million to help the company double the vaccine output. Further, the single-dose shot vaccine has also been approved by Health Canada. The vaccine commercialization is likely to provide a top-line boost.
It’s worth noting that the pharmaceutical segment is the company’s key driver for revenue growth and cash flow. For FY2020, the company reported $45.6 billion in pharmaceutical sales, which was higher by 8% on a YoY basis. Last year, the company invested $12.2 billion in research and development. With a strong product pipeline, healthy growth is likely to sustain.
With the Covid-19 pandemic, the company’s medical devices sales declined last year by 11.6% to $23 billion. A gradual turnaround in this segment is likely, which will support growth and incremental cash flows.
Overall, the company’s business segments are a cash-flow machine. Johnson & Johnson has a broad portfolio of products that deliver recurring cash flows. Therefore, JNJ stock is worth holding for the long-term for dividends and capital gains.
ILMN stock is another attractive name when it comes to healthcare stocks. The stock touched a high of $555 and has since corrected to about $400. At current levels, fresh exposure to the stock can be considered.
The company is a provider of DNA sequencing and array-based technologies. The company’s product application is in the field of life sciences, oncology, reproductive health and agriculture, among others.
It’s worth noting that Illumina already has leadership position in clinical genomics. For FY2020, the company generated $1.5 billion in clinical revenue. With a $3 billion investment in research and development in the last five years, the segment will continue to drive growth.
For the current year, the company has strong top-line guidance with revenue growth between 17% to 20%. Importantly, the key segments of sequencing, sequencing instruments and sequencing consumables are likely to deliver more than 20% YoY growth.
Overall, the company operates in a niche segment that has limited competition. With a robust growth outlook for sequencing and sequencing instruments, ILMN stock is a long-term buy and hold.
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 modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.