All people need healthcare, or will at some point. When everyone needs something, investors have huge opportunities.
Around $8.3 Trillion is spent worldwide on healthcare. Nearly half — $3.8 trillion — of global healthcare expenditures are spent in the U.S. with the sector growing at a faster rate than the rest of the world economy. These numbers will almost certainly grow by the end the decade.
How can investors reap the benefits of this growth? Here’s how to invest in healthcare stocks.
Different types and types of healthcare stocks
Because the healthcare sector is so large, there are many different types of healthcare stocks. Here are four of the most significant types:
Drug stocks Drugmakers work to develop drugs that can treat or prevent diseases. For drug development, pharmaceutical companies use chemicals. Biotech companies work with live organisms like bacteria or enzymes. From large corporations with billions of dollars in annual sales to small biotech businesses with no products yet on the market, drug stocks include both big companies and smaller ones.
Stocks for medical device: Medical equipment companies manufacture devices that are used in patient care. They make everything from disposable gloves to thermometers to artificial hearts valves and robotic surgery systems. There are many stocks in medical equipment and health technology stocks.
Payer stocks -Payers (including health insurance and pharmacy benefit mangers (PBMs)) play a significant role in the U.S. medical system. PBMs are responsible for administering prescription drug benefits and managing health plans for employers. Insurers charge premiums for individuals and businesses to cover healthcare costs.
Healthcare provider stocks Healthcare suppliers are at the forefront of healthcare delivery to patients. They include hospitals, doctor practices, home healthcare companies, and long-term nursing facilities.
Top stocks in healthcare to buy by 2023
There are strong healthcare stocks that can contain all types of companies. We will be looking at Vertex Pharmaceuticals NASDAQ :VRTX, Intuitive Surgical NASDAQ :ISRG), Novocure NASDAQ :NVCR), UnitedHealth Group NYSE :UNH and Teladoc Health NYSE :TDOC.
Vertex Therapeutics has been ranked as one the best biotech stocks. The company primarily focuses its efforts on drugs that treat cystic fibrosis. This rare genetic condition causes severe damage to the lungs, and other organs. Trikafta by Vertex, the company’s newest CF drug could help increase the number and quality of treatments it offers. The company is also developing drugs to treat other rare genetic disorders, as well more common diseases such as type 1 diabetes.
IntuitiveSurgical, a great example of stock for medical devices, also falls within the surgical stocks category. The Da Vinci robotic surgeon system from the company has been used in over 10 million procedures since 1999. COVID-19’s pandemic caused many elective surgery delays that hurt the company. Intuitive as well as its customers were also hit by it, resulting in a difficult supply chain. Long-term, there are tremendous growth potential for the company due to an aging population who will need the types of surgery that Da Vinci is often used.
Novocure is a marketer of a novel treatment for cancer called Tumor Treating Fields or TTFields. The therapy uses electromagnetic fields to disrupt the cell division of cancer cells. The therapy has been approved for mesothelioma and glioblastoma. Novocure is currently studying the therapy in clinical research that targets non-small cells lung cancer, ovarian, brain metastases and pancreatic carcinoma. These additional indications are 14 times more than Novocure’s current market.
UnitedHealth Group has been ranked the biggest health insurance provider in the world. It also manages one the largest PBMs, and is a leader when it comes to healthcare delivery. UnitedHealth Group’s size, stability, dividend and market share make it one the most attractive payer stocks. UnitedHealth Group may soon expand into the healthcare provider sector with the pending acquisition LHC Group of home-health services provider . (NASDAQ:LHCG).
Teladoc Health has been ranked as the best telemedicine stock. The company delivers healthcare over the telephone and the internet through telehealth. Teladoc acquired Livongo Health 2020 in order to provide a digital health platform for people who have chronic conditions, such as diabetes. The popularity of virtual care services increased with the pandemic. Teladoc experienced a slowdown in growth as COVID-19 case numbers declined. Its stock price has also dropped significantly from its highs. However, post-pandemic prospects for the company are still good. Telehealth and chronic illness management offer a way to manage healthcare costs. This is what individuals, employers, governments and health insurances want to do.
What to look at when shopping for healthcare stocks
How do I find the best healthcare stocks that I can buy? These are the four main things to watch out for:
1. Growth prospects
When looking into any healthcare stock, the most important thing to look at is its growth prospects. Check how rapidly revenue has grown in recent times. The future may not always be the same as it was in the past. The future may not always mirror the past.
Look at the investor presentations of companies to see their plans for growth and how they plan to reach their potential markets. Look at the strategies of your competitors to find out if they seem as good, or even better. Noting that many companies will mention competitors by name in their 10-K annually regulatory filings to U.S Securities and Exchange Commission, (SEC),
There is a chance that mergers & acquisitions (M&As), could help a company grow. M&A could have a positive impact on the growth of companies that have been successful in the past.
Don’t forget that dealmaking does NOT necessarily require the purchase of another company. Larger companies might collaborate with smaller competitors instead of purchasing them. Vertex Pharmaceuticals joined forces with small biotech CRISPR Therapy (NASDAQ,CRSP). Both companies collaborate to develop gene editing therapy exacel (also known by CTX001), for the treatment of beta-thalassemia or sickle cell diseases, which are rare blood disorders.
2. Financial strength
SEC filings also include financial statements, which can be used for evaluating a company’s financial strength. A company should already be profitable. If it’s not, you should find out what it plans to do to get there and when.
A company’s cash position can include cash, cash equivalents, short-term investments, and cash. It can be found in the company’s annual and quarterly regulatory filings, on the balance (a financial statement listing all company assets, liabilities, shareholder equity, and other liabilities). Consider cash position as you would your savings, retirement, or checking accounts.
FCF (free cash flow) is another important indicator for financial strength. FCF refers the cash left over from operating expenses and capital spending (which includes money spent for buildings, equipment, or land). FCF is the company’s financial position.
3. Valuation
Before purchasing a new vehicle, you will need to find out its market value. Also, it’s important to know the exact value of your healthcare stock before you purchase it.
There are many valuation metrics. The most well-known valuation metrics is the price to earnings (P/E). It compares the stock’s value with its earnings per share. That is, how much earnings you get for every dollar you invest.
Some P/E rates are retroactive, meaning they take earnings from a past period (typically the 12 previous months). Forward P/E numbers, which include earnings estimates for one-year into the future and are more useful in assessing healthcare stocks’ valuations, are better. It is possible to compare P/E rates with similar stocks in the same sector and determine whether the stock is cheap or expensive.
The stock’s ratio of P/E is not necessarily a good indicator of a company’s potential growth. It could indicate that the company is more likely to grow than its counterparts. 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 with lower PEG rates (especially if they are less that 1) are more attractively priced than stocks with higher PEG.
4. Dividends
Some of the most desirable healthcare stocks pay dividends. This means that a portion the company earns is returned to shareholders. Dividends are a great way to increase your stock’s overall return.
The dividend yield shows how large the stock’s annual dividend payouts are relative to the share price. Consider the stock’s payout ratio. This is a measure of dividends as a percentage earnings. It also indicates how much of the company’s cash is being used in order to pay the dividend. A lower payout ratio means that dividend payments will likely be possible in the future.
What are the possible risks when investing in healthcare stocks
All stock investments come with risks. There is the chance that your competitors may develop better products and/or services. These risks can also be present for healthcare stocks.
Healthcare is very regulated. The FDA can deny approval to medical device and drug makers to market their products. The growth prospects of a healthcare stock can be dramatically affected by regulatory changes. The Food and Drug Administration oversees the regulation and supervision of medical devices and drugs in the U.S. It’s smart for you to pay close attention to FDA action regarding medical stocks.
Numerous healthcare stocks also have significant litigation risk. If patients feel that their healthcare provider or biopharmaceutical company has caused them harm, they may sue.
In order to sell their products, drugmakers as well as medical device manufacturers need to convince payers such that they will buy them. Companies that fail to receive reimbursement approvals can have their growth prospects reduced.
Medicare reimbursement levels are crucial for many healthcare providers. Medicare will soon have the ability to negotiate with drugmakers prices. Medicare pays less for some drugs and could cause a decrease in profits and revenues for drug companies.
Health stocks should be able to provide healthy returns
These risks are not a problem, but the overall outlook for healthcare stocks over the long term is very positive. With the advancements in technology and aging populations around the world, healthcare stocks could open up huge opportunities.
