Everyone needs healthcare at one time or another. Investors have a great opportunity when healthcare is available to everyone. Globally, healthcare is worth $8.3 trillion. Nearly half of healthcare spending worldwide — approximately $3.8 trillion — is in the United States. The U.S. healthcare sector has grown significantly faster than the global economy overall, so the numbers will likely be even higher by the end if the decade ends. How can investors make money from this growth? Here are the facts about healthcare stocks.
Diverse types of stocks in healthcare
There are many types of stocks in the healthcare sector. The following four types are the most important:
- Stocks of drugs: Drugmakers are focused on the development of drugs that treat and prevent disease. Pharmaceutical companies use chemicals, while biotech companies use living organisms like bacteria and enzymes to create drugs. The drug stocks can be large companies that make billions each year, or small biotech companies that have no products yet.
2. Stocks of medical devices: Companies that make medical devices are able to provide care for patients. These devices include disposable gloves, thermometers, artificial heart valves, and robotic surgical system. Stocks of medical devices include both health tech stocks and stocks of medical equipment.
3. Payer stocks: Payers include health insurance companies and pharmacy benefit managers (PBMs). They play an important part in the U.S. healthcare system. PBMs provide prescription drug benefits to employers and employees, while insurers charge premiums to both individuals and employers to cover healthcare costs.
4. Healthcare provider stocks: Healthcare providers are at the forefront of providing healthcare services to patients. These include hospitals, physician offices, home health companies and long-term care facilities.
Top Healthcare Stocks to Buy in 2023
Each type of stock in healthcare stocks can have strong companies. We will look at at least one example from each: Vertex Pharmaceuticals, Intuitive Surgical(NASDAQ:ISRG), Novocure [NASDAQ:NVCR], UnitedHealth Group (NYSE :UNH], Teladoc Health and Teladoc Health.
- Vertex Pharmaceutics is a top-ranked biotech stock. The company focuses primarily on the development of drugs to treat cystic fibrosis (CF), a rare and severe genetic condition that can damage the lungs and other parts of the body. Trikafta is Vertex’s newest CF medication. It could increase the number of patients it can treat by over 50%. Vertex is also working on drugs that target other rare genetic conditions, as well as common diseases like type 1 diabetes.
- Intuitive Surgery is an excellent example of a stock of medical devices that also falls under the category of surgical stocks. Since its introduction in 1999, the Da Vinci robotic surgical machine has been used for more than 10,000,000 procedures. COVID-19 caused a number of elective surgeries to be delayed, which hurt the company’s bottom line. Intuitive was also affected by the disruption to its supply chain. The company sees tremendous growth opportunities in the future as an aging population requires the type of surgical procedures that Da Vinci is used frequently.
- Novocure offers a new treatment for cancer called Tumor Treating Fields, or TTFields. This therapy uses electric fields to stop cancer cells from division. TTFields is approved to treat glioblastoma, a type of brain tumor, and mesothelioma, a form of asbestos-related cancer. Novocure is currently evaluating the therapy in clinical trials that target non-small cell lung carcinoma, ovarian cancer and brain metastases. These additional indications combine to create a market potential 14 times larger than Novocure’s existing market.
- UnitedHealth Group is the world’s largest health insurance company. It also has one of the largest PBMs in the world and is a leader for healthcare delivery services. UnitedHealth Group is one of the most desirable payer stocks due to its size, stability and dividend. UnitedHealth Group’s pending acquisition LHC Group , a home healthcare services provider (NASDAQ :LHCG) could allow it to move into the market for healthcare providers.
- Teladoc Health is a top telemedicine stock. Telehealth services are provided by the company via the internet or over the phone. The company acquired Livongo Health, a digital platform that helps people with chronic conditions like diabetes, from Teladoc in 2020. Virtual care services were more popular after the pandemic. Teladoc’s growth was slowed by the decline in COVID-19 cases. Its stock also fell significantly from its peak. The company’s prospects after the pandemic should be good. Telehealth and chronic disease management are tools that can be used to reduce healthcare costs for individuals, employers, government, and insurance companies.
What should you look for when looking at healthcare stocks
How can you choose the best healthcare stocks to invest in? Here are four things you should be looking for:
1. Growth prospects
You should be looking at the growth prospects of any healthcare stock. Find out how fast revenue has grown over the past years. The past doesn’t always reflect the future. If a company has not been able achieve strong revenue growth in the past, it likely won’t do so in the future.
To learn more about the strategies of growth and potential markets, check out the investor presentations posted on the company websites. Compare the strategies of rival companies to determine if they are as good or worse. In their annual 10-K regulatory filings to U.S Securities and Exchange Commission (SEC), companies often name specific competitors.
Do not overlook the possibility of mergers and acquisitions (M&A). They could increase a company’s chances of success. M&A has helped companies grow in the past. Companies could look for new deals in the future.
Remember that dealmaking does not necessarily involve the purchase of another company. Sometimes, larger companies will partner with smaller players rather than buying them. Vertex Pharmaceuticals, for example, teamed up with CRISPR Therapeutics (NASDAQ :CRSP). These two companies have joined forces to create gene-editing therapy exacel (also known under CTX001), which will treat sickle cell disease and beta-thalassemia, two rare blood conditions.
2. Financial strength
SEC filings include financial statements which can be used to assess a company’s financial strength. A company should be already profitable. If the company isn’t profitable, find out how it plans on becoming profitable and when it will do it.
The cash position of a company includes cash, cash equivalents and short-term investments. The balance sheet is a financial statement that lists all assets, liabilities and shareholder equity. It is available in company’s quarterly and annual regulatory filings. You can think of cash position in the same way as you would about money in savings, checking and retirement accounts.
The company’s free cash flow (FCF), is another important indicator of financial strength. FCF refers to the cash left after capital expenditures and operating expenses (including money spent on land, buildings, equipment and other assets). The FCF of a company is similar to its cash position. It’s a measure of how strong he or she is financially.
3. Valuation
Before you purchase a car, you should determine its value. This will help you to ensure that your purchase is fair.
There are many valuation metrics. This ratio measures the stock’s value relative to its earnings per shares. This means you will get earnings for every dollar you invest.
Some P/E rates look backwards. This means that they reflect earnings over the past 12 months. It is possible to compare P/E values of similar stocks in order to determine whether the stock is cheap or expensive.
A stock’s P/E ratio may be higher than its peers, but that doesn’t necessarily mean it is a good buy. This could be a sign that the company’s prospects for growth are better than its competitors. Be sure to also check out the stock’s price-to-earnings-to-growth (PEG) ratio, which incorporates projected earnings growth rates (typically over five years). Stocks that have lower PEG ratios, especially if they are less than 1, are more appealingly valued.
4. Dividends
The best healthcare stocks pay dividends, which is a portion of earnings that the company pays to shareholders. Dividends can increase the return on your stock investment.
Dividend yield is a measure of how much a stock’s annual dividends are in relation to its current share price. The stock’s payout ratio measures dividends as percentages of earnings. It indicates how much cash the company is using to pay the dividend. The higher the payout ratio, then the more likely the company is to continue paying dividends in future.
What are the potential risks associated with investing in healthcare stocks
There are risks associated with investing in any stock, including the possibility of competitors developing better products or services. These risks are present in healthcare stocks as well as those that are unique to the sector.
Healthcare is tightly regulated. It is possible for drugmakers and medical device manufacturers to fail to obtain the regulatory approvals necessary to market new products. A healthcare stock’s growth prospects can be severely affected by regulatory changes. The Food and Drug Administration (FDA), in the United States, oversees regulation of medical devices and drugs. It is smart to be aware of any FDA actions related to medical stocks that you are watching.
Healthcare stocks are also at risk of litigation. Patients can sue biopharmaceutical and medical device manufacturers as well as healthcare providers if they believe their products or services caused them harm.
Drugmakers and medical device manufacturers must also convince payers (including PBMs and government agencies) to purchase their products. Companies can lose their growth prospects if they fail to get reimbursement approvals.
A lot of healthcare companies are dependent on Medicare reimbursement levels. Medicare will soon see changes that will allow it to negotiate drugmaker prices. Medicare may pay less for certain drugs, which could negatively impact drugmakers’ profits and revenues.
Stocks in healthcare should yield healthy returns
These risks aside, the outlook for healthcare stocks looks very positive over the long-term. The combination of aging demographic trends around the globe and technological advances should create tremendous opportunities for healthcare stocks. These stocks will also provide excellent returns for patient investors.
