There’s a lot of change afoot in the stock market right now as the new Republican regime takes aim at an ambitious policy agenda.
But of all the things the GOP and President Donald Trump want to accomplish in 2017, doing something about Obamacare is at the top of the list. And while the specifics of any new healthcare reforms are very much up in the air, one thing is certain …
In 2017, Obamacare will die.
The Affordable Care Act has long been criticized by many conservatives as a government overreach that is too costly for Washington and too burdensome on the healthcare sector. And now they are set to do something about that.
But what will replace the plan, if anything? What regulations are the most burdensome, and how quickly will they be removed after the vote? And most importantly, what publicly traded stocks are set to benefit most from this trend no matter what — regardless of infighting and gridlock that will occur in the short-term?
In this report, you’ll find 10 handpicked growth plays for 2017 that are the best investments in the entire sector. Every portfolio should have some — if not all — of these picks as a way to tap into growth and to weather any trouble thanks to the recession-proof nature of healthcare.
Thanks for your interest in InvestorPlace, and best of luck with your investments!
Jeff Reeves
Executive Editor, InvestorPlace.com
Stryker (SYK)
The results of the 2016 election have caused much turmoil in the markets, especially in healthcare. But one area within the sector that has not been too volatile is medical equipment. After all, while there is room for disagreement on how expensive you can price some drugs or how to disclose side effects of medication, equipment such as surgical tools are much more straightforward.
In fact, I like to think of Stryker Corporation (NYSE:SYK) as more of a power tool company than a medical company. It just happens to make tools for surgeons instead of plumbers or mechanics.
Stryker tools are very sophisticated, however, and are in high demand as they make modern techniques like hip replacements much easier on both doctors and patients. In fact, thanks to its patented medical tools, Stryker is now into its 10th straight year of revenue growth. Throw in an aging population of baby boomers who want to stay active in their golden years, and the joint replacement technology of Stryker is going to be a big growth business.
All that is reason enough to jump into SYK, but the kicker is that newly elected Republicans have the will and the numbers to kill the 2.3% tax on medical device maker’s profits that Obamacare imposed to defray some of the program’s cost. Lifting that would make the margins even sweeter, and the profit potential of SYK even bigger.
Many elements of Obamacare are hard to pin down, but the end of this medical device tax is universally appealing to the GOP — and to Stryker shareholders.
Cryolife (CRY)
Surgical supply outfit Cryolife Inc (NYSE:CRY) is one of the smallest names on this list of healthcare stocks to buy, with a market cap of only about $600 million. In some regards, that makes it a bit riskier than blue-chip names in the space, but if you consider the way the industry is going to change under President Trump and a GOP Congress, things are not quite as risky as they seem.
For starters, the “reflation” trade we’ve seen since Election Day is all about small businesses. They will have easier access to capital as banking regulations are eased, and a simpler path to growth. This will allow a company like Cryolife to really rev up. Like the aforementioned Stryker, CRY has seen a decade of steadily growing revenue, and the timing is perfect for its growth rate to shift into high gear.
After all, 2016 sales grew 5% over the prior year — and that’s without a single industry regulation being changed yet! Imagine what that growth rate could be with easier policy and better access to capital?
Unlike some larger companies, Cryolife’s earnings growth admittedly hasn’t been as reliable. However, the company remains comfortably profitable over the long-term, and that’s no small feat for a small-cap medical stock under the Obama regime.
This is exactly the kind of company that will prosper under healthcare reform, so don’t sweat the specifics of legislation and embrace the increased profits at CRY.
UnitedHealth (UNH)
UnitedHealth Group Inc (NYSE:UNH) is the most obvious winner for a world where the healthcare insurance landscape changes. After all, UNH stock rallied nicely in 2016 on the simple news that, because it wasn’t making money in government-sponsored healthcare exchanges, it would be scaling back those efforts in the coming year.
Ever since Donald Trump won the presidency and Republicans have taken the House, that momentum has only increased on the idea that UnitedHealth was ahead of the curve and best prepared to prosper in a new healthcare environment in 2017.
UNH rallied more than 20% since the October lows through the end of 2016, ran out of gas for a few months as much of the optimism became priced in, and has since put together a quick rally that also pulled back. This recent dip is a big buying opportunity. After all, last year’s rally was for obvious reasons — and while you may not make 20% in quick order again swing trading UnitedHealth, it’s reasonable to expect double-digit gains across the next 12 months..
Remember, too, that the dividend yield of UNH stock is just 1.6%, so many investors have been reluctant to take this healthcare play vs. the field simply because of its anemic payouts. But dividends are only about 26% of next year’s earnings, and those who get in at a good price now could enjoy significant payout increases across 2017 and beyond.
The reality is that Obamacare is falling away, and private insurance is the only game in town. UNH is as stable as they come as a result — and thanks to increased profitability and the near-certainty of increased dividends in 2017, you can rely on this low-risk healthcare play regardless of the broader market environment.
Quest Diagnostics (DGX)
While biotech stocks are the more interesting way to play healthcare because of their breakout potential on new cures, let’s not overlook the big growth that is out there simply for run-of-the-mill medical companies that are the unsung heroes of hospitals and doctor’s offices nationwide.
One such company is Quest Diagnostics Inc (NYSE:DGX), one of the largest testing companies in the U.S. Quest does everything from routine bloodwork needed for an annual physical to pre-employment drug testing to simple medical exams required by life insurance companies before they underwrite your policy.
It’s not glamorous work. But Quest covers so many corners of the testing market that it’s very likely you and your family have used its services in the past year without even knowing it.
This reliable revenue stream from operations supports an impressive and growing dividend. Since 2011, the quarterly dividend has ramped up from 10 cents per share to 45 cents per share after a recent increase. Furthermore, that’s only a third of next year’s earnings, so the distributions are ripe for future increases as well.
The icing on the cake: At a recent event, Quest Diagnostics upped its revenue growth outlook and was already optimistic about the future in a world where Obamacare may be falling away. Private testing companies like this will only grow even more in 2017 as demand increases and the regulatory environment becomes more favorable.
Johnson & Johnson (JNJ)
Johnson & Johnson (NYSE:JNJ) is the perfect example of a bedrock stock, with massive operations and a stable consumer products division with brands like Tylenol and Band-Aid. These items are recession-proof purchases that won’t dry up regardless of the macroeconomic environment.
However, unlike other sleepy staples plays, J&J also has significant upside potential thanks to higher-margin medical products. These includes pediatric vaccines via its Crucell unit, which was acquired in 2011, as well as its Synthes surgical tools and implants unit, which was acquired in 2012.
As the buyouts of Crucell and Synthes show, Johnson & Johnson isn’t afraid to spend big to unlock new areas of growth. And with some $40 billion in cash and investments and its position as just one of two public companies with a AAA credit rating, there is plenty of dry powder at JNJ for 2017 … and beyond.
Americans will cut back on a lot in hard times, but they will never cut back on the items that reduce their pain and improve their quality of life. This makes Johnson & Johnson a reliable investment with reliable cash flow that fuels a 2.6% dividend that has been paid since World War II.
What’s not to like here if you’re looking for a low-risk stock? When it comes to a rock-solid investment, this company is truly in a class by itself.
Ventas (VTR)
Ventas, Inc. (NYSE:VTR) is technically a real estate investment trust (REIT), and not actually in the healthcare sector. However, the focus of Ventas real estate is 100% related to medicine with a portfolio of about 1,300 skilled nursing facilities, senior housing properties and specialty hospitals.
It’s the senior housing element that is particularly appealing to low-risk investors, since this business is as close to a sure thing as you’ll find. The demographic shift in America is well-documented and irreversible, and the graying of the baby boomer generation all but guarantees more “customers” creating demand at senior-living facilities in the U.S.
VTR just happens to be one of the largest operators in the space, and that makes it a nearly sure thing, too.
Even better, almost half of Ventas properties operate under the lucrative “triple net lease” model where tenants are responsible for paying real estate taxes, building insurance and maintenance. That’s a streamlined and cost-effective deal for the operator, and VTR investors have been paid back nicely via a 5% dividend fueled by these properties.
As Americans age and increasingly rely on housing facilities and medical offices over the coming years, companies like Ventas have no trouble renting out their space at a nice premium. And as those rent checks keep rolling in, you can expect the dividends to keep growing from this value play, too.
If you want to play healthcare but are uncertain how the sector will change amid new policy proposals, stick with this REIT for stability and dividends that will serve you well in any environment.
Intuitive Surgical (ISRG)
Intuitive Surgical, Inc. (NASDAQ: ISRG) is one of the biggest growth stories in healthcare over the past decade or so, with revenue exploding from about $373 million in fiscal 2006 to $2.7 billion in 2016. And while sales have grown more than sixfold in the last decade, ISRG stock has done almost as well. In 2006, the company was trading for $110 or so per share; now the stock trades for more than six times that at well over $700.
Many times over the past decade, bears have warned that the run is over and that shares can’t push higher. But after a few months of softness, ISRG always comes roaring back — just as it did from its modest pullback of 10% from October through the New Year.
The fundamentals of Intuitive Surgical are still stellar, recently announcing a double-digit increase in net income and revenue in FY2016 over FY2015, with a $2 billion stock repurchase plan enacted to boot. Looking forward, revenue growth projected in 2017 will be in the double digits, and an aggressive $3 billion share repurchase program should also drive earnings expansion of around 10%.
Those who have counted out Intuitive Surgical because of its “expensive” share price have missed out big-time in the last 10 years. And considering a pullback in shares has come at the same time Republicans are easing healthcare regulations and a pro-business environment is on the march, the timing couldn’t be better to get into this stock.
Allergan (AGN)
Allergan plc (NYSE:AGN), the maker of Botox and Restasis, may be one of the market’s best-kept secrets.
While Botox and dry-eye treatment Restasis are the company’s first and second-best selling drugs, together they only account for about a third of Allergan’s revenue. Far too many pharmaceutical outfits rely too much on just one or two drugs to drive the bulk of their sales. Allergan doesn’t.
That’s in part because Allergan CEO Brent Saunders has proven to be the master of intelligent, cost-effective acquisitions — including a recent $2.9 billion deal for regenerative medicine startup LifeCell.
Politicians in Washington fight about a lot of things, but coming up with new-age cures and innovative methods to keep Americans healthy is something they all can agree on. Thankfully, AGN stock has a strong baseline of revenue from its Botox and Restasis treatments and an impressive pipeline of up-and-coming cures to rely on in the years ahead. That means it’s well-positioned to wait out any infighting until actual health care reform passes … and then profit once it happens.
Incyte (INCY)
Incyte Corporation (NASDAQ:INCY) is one of the best next-generation pharma plays out there. It’s research has created several top notch oncology treatments for niche forms of cancer and bone disease, including a medication called Jakafi that treats the bone marrow disease known as myelofibrosis.
Obviously, the patient pool for conditions like myelofibrosis — a disorder that leads to anemia and reduced blood cell production — is not as large as a more common condition like high blood pressure or arthritis. However, niche drugs like Jakafi can get expedited approval from the FDA and often come to market as the only treatment available. This means more immediate payoff, and more significant margins when you have a hit.
No wonder revenue at Incyte was up 47% last year, and is on pace to grow 48% this year. And no wonder Incyte stock has more than doubled in the past 12 months and is a perpetual buyout target as a result of its success.
Unlike other biotech startups that bleed cash, doesn’t need a buyout to survive, however. Incyte has moved into consistent profitability and margins will keep widening as the research pipeline yields more opportunities in 2017.
With a Trump administration likely to be sympathetic to shorter trial periods and higher profitability for comapnies like Incyte, this company will thrive on its own. And if a buyout offer does transpire, you can be sure a GOP Congress and White House won’t stand in the way.
Gilead Sciences (GILD)
Gilead Sciences, Inc. (NASDAQ:GILD) has been one of the best biotech stocks on Wall Street, soaring about 190% in the past five years even as the S&P 500 has only increased about 70% in the same period.
Equally impressive is that revenue has exploded from $9.7 billion in fiscal 2012 to $31 billion at the end of 2016.
Alongside that big growth in the top line has been serious profitability that has prompted GILD to start paying dividends in 2015. After a recent increase, the company already yields 3% in annual payouts, giving it a great combination of income potential and growth in its next-generation biopharmaceutical treatments for blood conditions including hepatitis and HIV/AIDS.
Admittedly, 2016 was a bit rough for GILD stock as the company faced patent expirations on its blockbuster Tamiflu influenza treatment, among others. That, coupled with Democrats like Elizabeth Warren targeting biotech companies for alleged price gouging created a lot of uncertainty that has extended into the early stages of 2017.
But this is a much more dynamic company that the dead money Big Pharma names that have underperformed for a decade or so. Gilead has acquired four smaller biotech firms in the past two years in addition to aggressively expanding in-house R&D, and has learned from the pain at companies like Pfizer Inc. (NYSE:PFE) and Merck & Co., Inc. (NYSE:MRK) and will not repeat their mistakes.
With the end of Tamiflu patents now priced in and a more favorable environment in 2017 under a GOP-controlled Congress, GILD has stabilized and could be a big winner in the new year as its new products start coming to market.
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