Healthcare stocks are once again in the spotlight as the delta variant rides a new wave of coronavirus infections across the globe. As countries batten down the hatches again, it’s not surprising to see investors once again turn their attention towards the healthcare industry. With that in mind, let’s take a look at the healthcare sector.
Innovation in the medical arena is poised to accelerate over the next decade. Aging demographic trends stateside and across the world, along with rapid advances in technology, should create significant growth opportunities for healthcare stocks. The pandemic has been forcing healthcare providers to adopt new tools. And the aging and growing global population fuels demand for innovative treatments. As a result, companies that successfully merge healthcare and technology should be at the top of the shopping list of all long-term investors.
Research from Insider Intelligence highlights, “the US healthcare industry is massive, with healthcare spending accounting for over 17% of US GDP.” And according to metrics from the Centers for Medicare & Medicaid Services (CMS), “National health spending is projected to grow at an average annual rate of 5.4 percent for 2019-28 and to reach $6.2 trillion by 2028.”
The pandemic continues to create plenty of activity around healthcare, which is excellent news for the best healthcare stocks. House Democrats recently passed a $3.5 trillion budget resolution in its effort to put together an economic package that enhances the country’s social safety net. When trillions of dollars are spent, there will always be plenty of healthcare companies well-positioned to earn significant revenue each year.
With that information, here is our list of the top seven healthcare stocks to buy.
- AbbVie (NYSE:ABBV)
- Baxter International (NYSE:BAX)
- Health Care Select Sector SPDR Fund (NYSEARCA:XLV)
- Johnson & Johnson (NYSE:JNJ)
- Medtronic (NYSE:MDT)
- UnitedHealth Group (NYSE:UNH)
- Vertex (NASDAQ:VRTX)
Healthcare Stocks to Buy: AbbVie (ABBV)
52 week range: $79.11 – $121.53
Dividend yield: 4.31%
Chicago, Illinois-based AbbVie is one of the world’s largest pharmaceutical companies with strong exposure to immunology and oncology. Its top drug, Humira, represents close to half of the profits.
AbbVie announced strong Q2 results in late July. Worldwide total revenue increased 34% year-over-year (YOY) to almost $14 billion. Net income came in at $766 million, or 42 cents per diluted share, compared to a net loss of $738 million, or 46 cents loss per diluted share, in the prior-year quarter.
On the results, CEO Richard A. Gonzalez said, “AbbVie delivered another strong quarter and our business continues to perform extremely well across the portfolio, with AbbVie’s new immunology assets contributing more than $1 billion of combined sales in the quarter.”
Humira is still the primary growth driver, generating sales of almost $20 billion in 2020 alone. Yet, AbbVie will lose its U.S. patent exclusivity in 2023. Nonetheless, the drug is still expected to boost overall growth in the coming years. The biopharma group has a robust pipeline of new products such as Skyrizi, Rinvoq, and Imbruvica that should help compensate for the expected decline in Humira revenue.
ABBV shares have recently hit an all-time-high (ATH) of $121.53. AbbVie recently saw a sizable dip after the FDA announced the company must label it’s Rinvoq products with a heart-risk warning label. However, this was more due to data relating to heart-risk in Pfizer’s (NYSE:PFE) arthritis drug, Xeljanz. ABBV stock is still up 5% year-to-date, and could be in a prime “buy the dip” position. It has surged by almost 22% over the past year. AbbVie is also a Dividend Aristocrat stock that offers a lucrative 4.31% dividend yield.
Fears around the loss of Humira exclusivity have restrained the stock’s valuation below the fair market values of its peers. I believe ABBV stock is a reasonable pick for buy-and-hold investors looking to add stability and a solid dividend stock to their portfolio. Forward price-to-earnings (P/E) and current price-to-sales (P/S) ratios stand at 9.62 and 3.99, respectively.
Baxter International (BAX)
52 week range: $73.12 – $88.32
Dividend yield: 1.47%
Deerfield, Illinois-based Baxter International’s healthcare product range extends to renal care, medication delivery, clinical nutrition, surgery and acute therapies. The group announced Q2 results in late July. Total revenue increased 14% YOY to $3.1 billion. Adjusted net income soared 24% YOY to $409 million, or 80 cents earnings per diluted share, beating the market expectation by 5 cents. The company generated a free cash flow of $525 million during the quarter.
CEO José E. Almeida remarked, “As markets worldwide continue to cope with the effects from the COVID-19 pandemic, Baxter’s second quarter performance reflects the diversity and durability of our lifesaving portfolio combined with the breadth of our geographic reach.”
In August, Baxter partnered with Amazon Web Services (AWS), a subsidiary of Amazon (NASDAQ:AMZN) to deliver cloud-based digital health solutions for patients. Analysts highlight it would also increase Baxter’s technological capabilities and business processes.
Over the past year, as hospitals delayed procedures to help manage the pandemic, Baxter hasn’t been an attractive stock to hold. BAX stock hovers around $80, sporting no real gain YTD. With a recovery evidently occurring, the stock is also an attractive pick for risk-averse investors in need of safe, recurring income. The stock offers a dividend yield of 1.47%. Forward P/E and current P/S ratios stand at 21.19 and 3.11, respectively.
Healthcare Stocks to Buy: Health Care Select Sector SPDR Fund (XLV)
52-Week Range: $100.31 – $136.98
Dividend Yield: 1.4%
Expense Ratio: 0.12% per year
Our next choice is an exchange-traded fund (ETF). The Health Care Select Sector SPDR Fund invests in firms in a range of industries, including biopharma, health care technology and equipment, health care providers and life sciences tools. XLV has 65 holdings and tracks the returns of the Health Care Select Sector Index. The fund began trading in December 1998.
The healthcare equipment and supplies sector comprises 28.54% of the fund, followed by the pharmaceuticals and healthcare providers sectors, with 27.54% and 18.95%, respectively. The top ten holdings in the fund account for almost half of net assets of $33.6 billion. Johnson & Johnson, United Health, Pfizer and Abbott Laboratories (NYSE:ABT) lead the names in the fund.
Over the past year, XLV is up about 27% and hit a record high on August 23. It has gained 20% YTD. I believe the macroeconomic backdrop for the healthcare industry remains bullish. However, readers wishing to have exposure to large-capitalization (cap) U.S. healthcare names might want to wait for a pullback before investing.
Johnson & Johnson (JNJ)
52 week range: $133.65 – $179.92
Dividend yield: 2.44%
New Brunswick, New Jersey-based Johnson & Johnson is among the largest and most diverse healthcare firms, making essential medicines, consumer goods and other personal hygiene products used daily. Its portfolio of therapeutics addresses around 20 illnesses, including cancer, epilepsy and Alzheimer’s disease.
Johnson & Johnson announced solid Q2 results in mid-July. Revenue increased 27% YOY to $23.3 billion. The medical device segment surged 63% YOY to around $7 billion. Non-GAAP net earnings also went up by 49% to 6.6 billion, or $2.48 diluted earnings per share.
Following the announcement, CEO Alex Gorsky said, “Our second-quarter results showcase Johnson & Johnson’s diversified portfolio, driven by strong sales and earnings growth across our Medical Device, Consumer Health and Pharmaceutical businesses.”
As the world’s largest healthcare-based conglomerate with a $460 billion market cap, Johnson & Johnson isn’t expected to grow at a thrilling pace. Instead, investors are likely to see a steadily growing stock price and quarterly dividends that increase year after year.
JNJ stock is a member of the Dividend Kings club, currently supporting a generous 2.44% dividend yield. Its history of solid dividend payments makes JNJ stock a compelling addition to any buy-and-hold investor portfolio.
The shares have hit a record high in recent days, and currently hover at $174, up by 11% YTD. Forward P/E and current P/S ratios stand at 16.61 and 5.21, respectively. A potential decline toward the $170 level or below would improve the margin of safety.
Healthcare Stocks to Buy: Medtronic (MDT)
52 week range: $98.94 – $135.67
Dividend yield: 1.89%
Medtronic is a large medical technology group that manufactures medical devices and technologies to hospitals, physicians, clinicians and patients worldwide. Its portfolio includes pacemakers, defibrillators, heart valves, stents, insulin pumps, neurovascular products and surgical tools.
The group released Q1 2022 results in late August. Net revenue surged 23% YOY to just under $8 billion. Non-GAAP net income of $1.9 billion translated into $1.41 per diluted share. A year ago, these metrics had been $836 million, or 62 cents per diluted share. Free cash flow was $914 million. Cash and equivalents ended the quarter at $3 billion.
CEO Geoff Martha remarked, “…we drove market share gains across a number of our businesses, including three of our largest: Cardiac Rhythm Management, Surgical Innovations, and Cranial & Spinal Technologies.”
Medtronic has a robust pipeline of new products that could lead to an even stronger position in the medical devices space. For instance, it is on track to launch new products like Micra AV and the Hugo robotic-assisted surgery platform that could potentially become key growth drivers in the long term. In addition, Medtronic has entered a definitive agreement to acquire sinus implant maker Intersect ENT (NASDAQ:XENT) for $1.1 billion.
MDT stock has recently hit a multi-year high of $135.67. The stock currently trades slightly below its peak value at around $134. It is up 15% so far in 2021.
The company is also a dividend aristocrat with 43 consecutive years of dividend growth. The current price supports a 1.89% dividend yield. Forward P/E and current P/S ratios stand at 23.31 and 5.73, respectively. Interested readers could consider investing around $130 or below.
UnitedHealth Group (UNH)
52 week range: $289.64 – $431.36
Dividend yield: 1.39%
Minnetonka, Minnesota-based UnitedHealth is the largest private health insurance provider stateside. Its reach extends to employer-sponsored, self-directed and government-backed insurance plans. The insurer provides medical benefits to almost 50 million members.
UnitedHealth Group announced Q2 results in mid-July. Revenue grew 15% YOY to $71.3 billion. Net income came in at $4.27 billion or $4.46 per diluted share, down from $6.64 billion or $6.91 per diluted share in the prior-year quarter. Adjusted earnings per share stood at $4.70, down 34% from $7.12 in the prior-year period. Cash and equivalents ended the quarter at $19.8 billion.
In addition to insurance, the company provides preventive care services such as routine wellness visits, cancer, other health screenings, as well as the management of chronic conditions and vaccinations.
Earlier in the year, management announced it would be buying the tech and analytics company Change Healthcare (NASDAQ:CHNG) for $13 billion. Last year, the company also acquired full-service pharmacy Divvydose, a rival to Amazon’s PillPack, for over $300 million.
UnitedHealth returned $1.4 billion to shareholders via dividends in the second quarter, following a 16% increase in June. UNH stock currently supports a dividend yield of 1.39%.
The shares hover slightly above $420 and the YTD return stands at 20.5%. The stock has surged 35% over the past 52 weeks. With a market cap of $399 billion, analysts regard the company as a stable addition to long-term portfolios. Forward P/E and current P/S ratios are 19.42 and 1.48 respectively. A potential decline toward $400 would make the shares more attractive for buy-and-hold investors.
Healthcare Stocks to Buy: Vertex (VRTX)
52 week range: $185.33 – $281.86
Our final stock for the day is the biotech group Vertex Pharmaceuticals, which is well-known for its portfolio of drugs against the potentially fatal disease cystic fibrosis (CF).
Vertex issued Q2 results in late July. Sales of its CF drugs increased by 18% YOY and reached $1.8 billion. Adjusted net income also went up buy 18% YOY to hit $811 million or $3.11 per diluted share.
On the results, CEO Reshma Kewalramani commented, “In the second quarter of 2021, we saw continued, significant growth and strong business performance in our cystic fibrosis franchise. We have now secured reimbursement agreements for the triple combination in more than 15 countries outside the U.S. and started expansion into younger age groups with the U.S. approval in patients 6 to 11 years of age last month.”
In addition, Vertex is investing in new drug development. For instance, it has recently teamed up with biotech CRISPR Therapeutics (NASDAQ:CRSP) to develop gene-editing therapy to treat beta thalassemia and sickle cell disease.
VRTX stock is down over 16% so far this year, trading around $200. It is about 30% below its high of $283.45 last year. Forward P/E and P/S ratios stand at around 15.90 and 7.74, respectively. Any further decline toward $190 would make the shares more attractive.
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, Ph.D., 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 three 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.