Healthcare Stocks
Everyone will need healthcare eventually. When there is something that everyone needs, investors have great opportunities.
The global healthcare sector is responsible for spending $8.3 trillion. About $3.8 trillion is spent on healthcare globally. With the U.S. growing faster than the rest, it’s almost certain that these numbers will rise by the end of this decade.
How can investors gain from this increase? Here’s how to invest in healthcare stocks.
Different types de healthcare stocks
The healthcare sector has so many types that there are many healthcare stocks. These four are the most vital types.
Pharma stocks: The focus of drugmakers is to create drugs that prevent or treat diseases. While pharmaceutical companies use chemicals, biotech companies develop drugs using live organisms (e.g. bacteria) that are made from enzymes or bacteria. You can find large biotech companies selling billions of dollars each year as well as small biotech firms without any products on this market.
Medical equipment stocks: The devices manufactured by medical device companies are used to treat patients. The devices include thermometers and disposable gloves as well as artificial heart valves. Robotic surgical systems are also available. The stocks of medical device stocks include many other health tech stocks as well as stocks of medical supplies.
Payer stocks -Payers (including health insurers and pharmacy benefits managers (PBMs)) play an essential role in the U.S. system of healthcare. PBMs manage prescription drug benefits for employers as well as health plans. While insurers charge premiums to individuals or employers to pay for healthcare, and PBMs charge premiums.
Healthcare provider stocks Healthcare companies are the leaders in providing healthcare services to their patients. They include long-term care facilities, hospitals, physician practices, and home health services.
Top healthcare stocks to purchase in 2023
Every type of healthcare stock can produce strong companies. We’ll take a look at Vertex Pharmaceuticals NASDAQ – VRTX, Intuitive Surgical NASDAQ – ISRG), Novocure NASDAQ – NVCR), UnitedHealth Group NYSE – UNH and Teladoc Health NYSE — TDOC.
Vertex Chemicals is one of the leading biotech stocks. The company focuses primarily upon developing drugs that treat cystic fibrosis. (CF) is a rare, genetic condition that damages the lungs and other body organs. Trikafta from Vertex is the latest CF drug. This could make it possible to treat more patients than half of those who are currently on its list. Other rare genetic diseases are being developed by Vertex, along with more common diseases like type 1.
Intuitive-Surgical is an example of a medical equipment stock that also falls under the heading of surgical stocks. The Da Vinci robotic surgical system from the company has been used in more 10 million procedures since 1999. COVID-19, which caused many delayed elective surgeries, severely damaged the company’s business. Intuitive, as well its customers, faced a tough supply chain environment. The company expects great growth in the long term, as the aging population will continue to require the kinds of surgical procedures Da Vinci is commonly used for.
market a novel treatment for cancer called Tumor Treating Fields. The therapy uses electrofields to disrupt cell division. TTFields was approved for treatment of mesothelioma as well as glioblastoma. Novocure has begun clinical trials to evaluate the therapy for non-small cell lung and ovarian carcinomas, brain metastases, pancreatic cancer, and other types of cancer. These additional indications together represent a potential market of 14x greater than Novocure’s current market opportunity.
UnitedHealth Group ranks among the top health insurers in the world. It also runs one of Europe’s largest PBMs. The company is a major provider of healthcare delivery services. UnitedHealth Group is one the most attractive payer stocks in the market due to its size, stability, dividend and financial strength. UnitedHealth Group will soon be able to enter the healthcare provider market by acquiring home health service provider LHC Group(NASDAQ:LHCG).
Teladoc Health is one of the most prominent telemedicine stocks. The company offers telehealth services that deliver healthcare online and over the telephone. Teladoc purchased Livongo Health from Livongo Health and now has a digital healthcare platform to help with diabetes management. The rise in virtual care services was a result of the pandemic. Teladoc suffered a slowdown as the number of COVID-19-related cases dropped. Its stock is also significantly lower than its highs. However, its post-pandemic prospects remain very positive. Individuals, employers as well as governments, are all trying to lower healthcare costs. Telehealth, chronic disease management, and other tools can help.
What to Look for in Healthcare Stocks
How do you determine which healthcare stocks are the best? You should look at these four things:
1. Growth prospects
The company’s growth prospects are the most important thing that you should examine when buying a healthcare stock. You should find out how quickly the company’s revenue has increased in recent years. The future does not always look like the past. A company that hasn’t seen strong revenue growth thus far probably won’t be able to do so in the near future.
You can learn about their strategies for growth as well as the size of potential markets by reading the investor presentations. Seek out competitors to see whether their strategies are similar or better. It is common for companies to name competitors in their annual regulatory filings of 10K to the U.S Securities and Exchange Commission.
There are many ways mergers, acquisitions (M&A), can increase a company’s growth potential. M&A may have helped companies in the past, but they could be looking to find new deals for the future.
Do not assume that dealmaking is a sale of a company. Larger companies may collaborate with smaller players, rather than buy them. Vertex Pharmas joined hands with small biotech CRISPR Therapies, (NASDAQ:CRSP). The companies have teamed up to develop gene modifying therapy exacel, also known as CTX001, to treat sickle and beta-thalassemia.
2. Financial strength
SEC filings contain financial statements. These financial statements can be used to help assess the financial strength of a business. A company should be financially sound. If it isn’t, it is important to find out how the company plans to reach profitability and how quickly.
A company’s cash situation includes cash equivalents as well as short-term investment. It is listed on the balance sheets (a financial document that lists all assets, liabilities, equity, and shareholder capital) which are included in the company’s annual and quarterly regulatory filings. As you would think about your cash position, consider how much money is in your savings, checking, and retirement accounts.
Another indicator of financial strength is the company’s free liquidity (FCF). FCF, or free cash flow, is the excess cash after operating expenses and capital spendings. It includes money that was spent on buildings and equipment. FCF, like cash position, is a measure of financial strength.
3. Valuation
It is important to find out how much a brand new car is worth before purchasing it. Also, before buying a healthcare stock, it is important to determine its value so that you know what you’re getting for your money.
There are many valuation measures. The most commonly used valuationmetric is the price/earnings (P/E). It compares a stock’s cost to earnings per share. Or, how much earnings you receive for every dollar that you invest.
Some P/E numbers are forward-looking or reflect earnings for a past period (typically 12 months). Forward P/E, which uses earnings estimates for one calendar year, can be more useful when assessing valuation of high-growth healthcare stocks. The P/E ratios can be compared to other stocks within the same industry to help determine if the stock’s value is high or low.
Not just because a stock has a higher P/E than its peers does not mean it’s a good investment. 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 Ratios (especially when they are less that 1) are more attractively priced than stocks with higher PEG Ratios.
4. Dividends
The dividends paid by the top healthcare stocks are a portion that the company gives back to shareholders. Dividends can improve the overall return of a stock.
The dividend yield indicates how high a stock’s annual dividend payouts are relative to the share price. The payout ratio is the percentage of earnings that a stock pays out in dividends. It shows how much of its cash it uses to cover the dividend. The company’s ability to pay future dividends is more likely to be measured by its payout ratio.
What are your risks investing in healthcare stocks
Stock investing comes with inherent risks. For example, there is the possibility that your stock could be taken over by competitors who may have better products and/or services. These risks apply to healthcare stocks as well, and others that are unique in the sector.
Healthcare is heavily regulated. There are many regulatory hurdles that drugmakers and medical devices manufacturers must overcome in order to bring new products to market. Changes in regulations can have a dramatic impact on a stock’s growth prospects. The Food and Drug Administration in the USA oversees drug regulation and medical device regulation. It is smart to pay attention any FDA action regarding medical stocks you are following.
A lot of healthcare stocks are also vulnerable to litigation. If patients feel the company’s products or services have caused them harm, then they can sue.
Additionally, drugmakers, medical device manufacturers, and health insurers must convince payers such as PBMs or government agencies to purchase their products. Companies may lose growth opportunities if they are unable to obtain reimbursement approvals.
Medicare reimbursement levels are a major source of income for many healthcare providers. Medicare will soon get changes that allow the program to negotiate price with drugmakers. Medicare pays less money for certain drugs. This could impact profits and revenue.
Healthy returns should be expected from healthcare stocks
The outlook for healthcare stocks over the long term is good, despite these risks. Combining technology advances with aging demographic trends worldwide, healthcare stocks should offer tremendous opportunities and healthy returns for patient investors.
