While you might not want to hear it, given we’re still in the global grip of Covid-19, it must be said: more pandemics are coming.
How much they will impact our day-to-day lives remains to be seen, but our current pandemic has shown investors the importance of diversified exposure to the healthcare sector. Positive vaccine news over the past several months has significantly improved the outlook for a return to normalcyand returned significant shareholder gains in many stocks. Over the past year, the Dow Jones U.S. Health Care Index is up over 36%.
Our country spends about 17% of its gross domestic product (GDP) on healthcare, one of the highest numbers worldwide. The industry umbrella covers major pharmas, smaller biotechnology firms, equipment manufacturers, telehealth businesses, healthcare providers, medical insurers and hospitals.
Here are 7 healthcare stocks to buy to prepare your portfolio for the next pandemic:
- Danaher (NYSE:DHR)
- ETFMG Treatments, Testing and Advancements ETF (NYSEARCA:GERM)
- Gilead Sciences (NASDAQ:GILD)
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV)
- Hologic (NASDAQ:HOLX)
- Immunovant (NASDAQ:IMVT)
- Pfizer (NYSE:PFE)
Given the devastating effects of the pandemic on personal lives and the economy, we can expect medical stocks to receive significant attention in the new decade as researchers and companies prepare for future pandemics.
Healthcare Stocks to Buy: Danaher (DHR)
52-week range: $119.60 — $248.86
Dividend yield: 0.37%
Our first choice for today is Danaher. The group manufactures scientific instruments and consumables in four segments: life sciences, diagnostics and environmental and applied solutions. The company has been growing both organically and through acquisitions.
In late 2019, Danaher separated its dental business through an initial public offering (IPO). That new company trades as Envista (NYSE:NVST). Then in early 2020, it acquired General Electric’s (NYSE:GE) Biopharma segment, Cytiva. Along with Fortive (NYSE:FTV), it is now expected to make a joint-bid for the British engineering group Renishaw (OTCMKTS:RNSHY).
Danaher released Q4 2020 financials at the end of January. Revenue increased 39.0% YoY to $6.8 billion. Bottom line of $1.2 billion was an increase of 55.0% YoY. Non-GAAP adjusted diluted EPS for Q4 2020 were $2.08, a 62.5% YoY increase. Free cash flows from continuing operations were $5.4 billion.
CEO Rainer M. Blair stated, “For the full year 2020, we achieved nearly 10% core revenue growth including Cytiva, strong margin expansion, and more than $5 billion of free cash flow.”
Over the past year, DHR stock is up over 59%. Forward P/E and P/S ratios of 29.50 and 7.13 indicate an overstretched valuation level. A potential decline toward the $210 level would improve the margin of safety. In the long-run, this company will benefit from higher demand for more medical and industrial products worldwide.
ETFMG Treatments, Testing and Advancements ETF (GERM)
52-week range: $23.80 – $44.69
Dividend yield: 0.17%
Expense ratio: 0.68% per year
Investing in the health sector via an exchange-traded fund (ETF) provides exposure to scientific development without needing to monitor the fast-paced pipeline of each company. This fund is made up of biopharma businesses developing cures and vaccines as well as diagnostic technology against infectious diseases.
GERM began trading in June 2020, and assets under management stand at $55 million. It currently has 77 holdings and the top 10 names comprise close to 45% of the fund. Life sciences groups Laboratory Corporation of America (NYSE:LH) and Bio Rad Laboratories (NYSE:BIO), whose vaccines are currently being used worldwide, are among the leading names in the ETF, as well as Moderna (NASDAQ:MRNA) and BioNTech (NASDAQ:BNTX).
Year-to-date (YTD), the fund is up more than 10% and hit a record high in early February. In the past nine months, GERM’s short-term fortunes have ebbed and flowed with vaccine news headlines, especially as companies approached the final stages of clinical trials and received approvals by national authorities.
The thematic nature of this fund might appeal to investors who want to prepare their portfolios for the next pandemic.
Gilead Sciences (GILD)
52-week range: $56.56–$85.79
Dividend yield: 4.35%
Biopharma group Gilead Sciences develops therapies for HIV, cancer and viral hepatitis diseases. It has also played a central role in the Covid-19 pandemic, as Veklury, Gilead’s brand name remdesivir product, has treated a large number of hospitalized patients. The company has a market capitalization of more than $80 billion.
Gilead’s Q4 metrics show that revenue increased by 26% YoY to $7.42 billion, catalyzed by Veklury sales. Non-GAAP net income almost doubled to $2.8 billion. Diluted EPS went up from $1.10 in Q4 2019 to $2.19 in fourth-quarter 2020. At the end of December 2020, Gilead had $7.9 billion on hand in cash and equivalents.
Management expects a gradual recovery in underlying market dynamics starting Q2 2021. The 2021 full year total revenue guidance currently stands in the range of $23.7 billion — $25.1 billion. In 2020, it was $24.4 billion.
CEO Daniel O’Day said, “As we head into 2021, we have many additional opportunities to help patients, especially in oncology where Trodelvy, for example has the potential to treat a broad range of cancer types. These new opportunities, together with our continued leadership in antivirals put Gilead on a clear path to growth.”
Yet the company’s two HIV drugs recently lost exclusivity in the U.S. and sales are expected to continue to decline in the near future. It is quite common for pharma groups to see increased competition for their therapies (such as generics or biosimilars by other companies) as patents expire. Nonetheless, this fact has been a drag on the the GILD share price in the past year.
GILD’s forward P/E and P/S ratios stand at 8.97 and 3.3, respectively. With its broad range of commercial therapies, robust pipeline, strong cash flow and juicy dividend yield, this company easily belongs in your portfolio.
Health Care Select Sector SPDR Fund (XLV)
52-Week range: $82.01 – $118.99
Dividend yield: 1.78%
Expense ratio: 0.13 % per year
Our next choice is another ETF, namely the Health Care Select Sector SPDR Fund. It gives access to businesses in the pharmaceuticals, biotechnology, healthcare equipment and services. Since its inception in December 1998, assets under management have grown to $24.3 billion.
XLV currently has 63 holdings, and the top 10 names make up close to half of the fund. Among those leading names are Johnson & Johnson (NYSE:JNJ), UnitedHealth (NYSE:UNH), Abbott Laboratories (NYSE:ABT), Pfizer, Merck (NYSE:MRK), Abbvie (NYSE:ABBV) and Thermo Fisher Scientific (NYSE:TMO). This top-heavy fund invests in some of the larger caps in the S&P 500 index. Many of these businesses have strong qualities including robust balance sheets, innovation and strong management.
The sector allocation is divided into Pharmaceuticals (28.27%), Healthcare Equipment & Supplies (27.66%), Healthcare Providers & Services (20.89%), Biotechnology (13.95%) and others.
Over the past 12 months, XLV has returned over 34%. The fund’s trailing P/E and P/B ratios stand at 16.26 and 4.71, respectively. Given the recent volatility and profit-taking in broader markets, a decline toward or even below $110 is likely. Such a drop would provide a better entry point for buy-and-hold investors in this healthcare fund.
52-Week range: $28.71 – $85.00
Massachusetts-based Hologic focuses on improving women’s health and well-being through early detection and treatment. The company operates in four segments including breast health, diagnostics, GYN surgical and skeletal health. It has been growing organically as well as through acquisitions.
In 2020, the company generated close to $3.8 billion in sales, with about half of revenue coming from diagnostics. This segment has seen an upsurge as its tests have been used extensively for Covid-19. Although we can expect diagnostics sales to decline in the coming months, I expect Hologic to put increased emphasis into this part of operations.
Hologic released FY2021 Q1 results in late January. Revenue was $1.61 billion, up 89% YoY. Net income was $749.6 million, up 457% YoY. Non-GAAP diluted EPS was $2.86, an increase of 469% YoY. Cash and equivalents as of Dec. 26, 2020 were $868.7 million, up 227.7% YoY.
CEO Steve MacMillan said in part:
“Hologic had a strong start to fiscal 2021 across all our businesses and major geographies. Our Diagnostics division continued to deliver incredible performance by making a massive impact against COVID-19. Furthermore, our Breast Health and Surgical businesses continued to strengthen, with each returning to growth in the United States, Europe and Asia-Pacific.”
HOLX stock’s forward P/E and P/S ratios are 8.58 and 4.17, respectively. Hologic’s focus has so far been mostly the U.S. But the new decade could easily see the company expand its operations overseas. With a market cap of about $19 billion, it has room for further growth.
Next on our list is Immunovant, a clinical-stage biopharmaceutical company that specializes in autoimmune diseases. The company became public in late 2019 following a reverse merger with Health Sciences Acquisitions Corporation, a special purpose acquisition company (SPAC). In a matter of weeks, IMVT shares saw a record high of $53.75, in part thanks to investors’ interest in the biopharma space in the year of the pandemic. But now, the shares are hovering at $15.
According to the U.S. National Library of Medicine, “An autoimmune disorder occurs when the body’s immune system attacks and destroys healthy body tissue by mistake. There are more than 80 types of autoimmune disorders.” Antibodies play an important role in immune defense against pathogens, which cause diseases.
For instance, a recent article published in Nature highlights, “The neutralizing antibodies that the immune system produces to disable the virus SARS-CoV-2 can last for at least nine months after infection, but not everyone makes them in detectable quantities.”
Pre-revenue company Immunovant has an investigational product candidate, IMVT-1401. It is intended as an injection to be applied under the skin for the treatment of autoimmune diseases caused by pathogenic IgG antibodies. However in early February, the company paused clinical trials due to elevated levels of cholesterol. That development has put immense pressure on the share price.
The company released Q3 results results in mid-February. Net loss for the quarter was $31.8 million, or 32 cents per common share. As the developments since February show, shares of biopharma companies can easily plunge on negative trial data news.
Immunovant is clearly facing a major setback now. The stock could be appropriate for those investors who are able to stomach high risk for high returns in their portfolios.
52-week range: $28.32 – $43.08
Dividend yield: 4.3%
Pfizer is a leading pharmaceutical group with a market cap of $202 billion. In 2020, annual sales exceeded $40 billion. Pfizer and partner BioNTech developed the first vaccine against Covid-19. Although the company has become a household name thanks to this vaccine, it’s portfolio and pipeline extends to a wide range of therapies, such as oncology, inflammation, immunology, rare diseases and other vaccines.
The company’s Q4 financials showed revenue of $11.7 billion, 12% YoY growth. Non-GAAP bottom line improved by 15% YoY from $2,055 million in Q4 2019 to $2,366 million in Q4 2020. Diluted EPS was 36 cents. At the end of 2020, the company’s cash and equivalents stood at $1.8 billion.
CFO Frank D’Amelio cited, “I am very pleased with how our company performed in 2020, and particularly in the fourth quarter, where we achieved double digit operational revenue growth driven by a wide range of products and geographies, including growth within all of our therapeutic areas.”
In 2021, Pfizer expects to post $59.4 billion to $61.4 billion in revenue. The midpoint of the guidance represents a 44% YoY growth. The increase in guidance was thanks to Covid-19 vaccine sales. The company’s forward P/E and P/S ratios stand at 11.14 and 4.77 respectively. Its reliable cash flow as well as dividends should put the company on the radar of passive income seekers.
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.