Healthcare stocks have been getting hammeredlately but that might mean it’s the perfect time to buy.
I’ve screened through the two-thousand plusnames in the sector to find five that should be on every investor’s radar for 2020.
I’ll not only show you those best healthcarestocks to buy but reveal why this entire group of stocks could be ready to explode.
We’re talking healthcare stocks to buy todayon Let’s Talk Money! Beat debt.
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Today is part four in our series on the beststocks to buy from each sector in 2020 and I’m excited about this one.
Today we get into one of the big universalforces I’ve been following for more than a decade, first as an economist and then asan equity analyst.
Not only will healthcare stocks benefit froman aging population, that big picture trend, but this is going to be one of the best safetysectors you can buy.
So what I want to do is going to be a littledifferent from our previous sector investing videos.
Instead of talking about how I picked thesefive healthcare stocks to buy, I’m first going to cover the big catalysts for the sectorand a strategy for getting the most from the group.
I’ll then reveal my five top stocks in healthcareand why I think they should go in your long-term portfolio.
I’m loving this series, covering the beststocks in each sector and it’s something so important but that most investors justdon’t realize.
Creating a portfolio that not only beats themarket but is also diversified away from the biggest market risks means finding those bestof breed companies from each sector.
You can’t just leave this up to chance, trying to find the best stocks to buy and hoping you’re diversified across sectors, it has to be a strategic effort.
So over these 11 episodes, one for each stocksector, I’ll show you how to pick the best of breed in each.
If you’re coming in later to the series, I’ll link in the first comment below the video to the most recent video.
I’ll also be linking in the video description, all the videos in the series so you can see all the stocks for each sector.
Very important here, since we’re not coveringhow I picked these stocks like we usually do, make sure you check out that first videoin the series.
In it, not only do I highlight some greattech stocks to buy, I detail the criteria I’m using to find stocks across the entireseries.
Here’s that graphic again and today we’relooking at the healthcare sector including drug stocks, biotech, medical services andequipment.
Comparing the sector performance here we seethat healthcare has lagged four of the 11 sectors and the market in the five-year periodwith a 40% return and has actually only produced a 4% return over the last year, lagging everysector except energy stocks.
So it seems the sector had a real breakoutperiod from 2012 through 2015 where it outperformed the market but it’s lagged ever since.
That’s not necessarily a bad thing as itactually means healthcare stocks aren’t as expensive as the rest of the market.
If you look at the sectors on a price-to-earningsbasis, so how much investors are paying for those earnings per share, we see that healthcareis the second least-expensive after financials.
Healthcare stocks are trading for 14.
8-timesanalyst expectations for earnings, that’s the dark-blue bar.
If you look at the green bar, the 10-yearaverage multiple for the sector is 14.
That means stocks in the group are only tradingat 3.
5% more expensive compared to that longer-term average which is really nice considering someof these other sectors like tech trading for 31% over its average and the market itselfat 14% more than its long-term average.
Besides that fundamental reason to look atthe sector, you’ve got a group of stocks with a stable revenue stream and pricing power.
Inflation in healthcare costs have grown at3.
4% annually over the last two decades against just 2.
1% growth in overall inflation andit’s that universal force of an aging population.
Over 10, 000 baby boomers are reaching 65 yearsold every single day and that trend is going to continue until 2029.
They’re moving into an age group that spendstwice the amount on prescription drugs, hospital services and other healthcare costs.
Now of course, the big overhang on healthcarehas always been regulation, or the threat of it by Washington.
I’m not going to get into a debate aboutthe cost or price controls.
I’m here to help you make money, not toput together a perfect society.
Regulation is always going to be a threatto profits for companies in the space and it’s something you need to watch but it’salso something these companies manage every single day.
Instead of worrying about what might be passed, focus on finding the best of breed companies in their industry, the best management teamsrunning these companies, and let them worry about regulation.
Now I want to reveal those five best healthcarestocks to buy but first lets look at three exchange traded funds, three ETFs, you canbuy to get broad exposure to the sector.
Use these if you can’t find individual companiesyou want to buy so you get that broader exposure for your portfolio.
First we’ve got the Healthcare Select SectorSPDR Fund, ticker XLV, with its 1.
6% dividend yield and super-low 0.
13% expense ratio.
The fund is pretty well diversified acrossindustries in the sector so it’s going to give you that overall investment.
Healthcare is an extremely diverse sectorwith growth industries like biotech and more stable companies in services.
Getting exactly the theme you want might meanlooking for a fund that covers or excludes a specific industry.
So maybe if you want that growth part of healthcare, you go with the iShares Nasdaq Biotechnology fund, ticker IBB.
This one is more expensive with an expenseratio of 0.
47% and doesn’t pay much of a dividend at all but the idea is you get fastergrowth and the fund has produced a 14% annualized return over the last decade so it might besomething to watch.
Or conversely, if you want a more stable returnand want healthcare without the volatile biotech group, you can go with something like theiShares US Healthcare Providers, ticker IHF.
This one is also slightly more expensive witha 0.
43% expense ratio but has an excellent 4% dividend yield and has produced a 15% annualreturn over the last decade.
The fund is split among the more stable industriesin the sector like managed healthcare, services and facilities so you shouldn’t get thebig ups-and-downs you see in biotech.
Now let’s look at the five stocks I’vefound that should be on everyone’s radar and what I’ve tried to do here is look forbest of breed companies across the industries in healthcare.
I want to give you ideas across the wholesector so we’ve got some drug makers and distributors, a biotech name, a services companyand one in the retail consumer segment.
CVS Health, ticker CVS, has gone nowhere thisyear but if you want one company that represents almost the entire healthcare sector, thisis it.
Between the 9, 800 retail pharmacies, insuranceunder the Aetna acquisition, a PBM and managed care organization, this company controls justabout every step in the healthcare chain except drug making.
Being able to control almost that entire supplychain from discounts on buying pharmaceuticals to the patient experience, that advantagehelps CVS control costs and customers like no other company.
Shares trade for just 9.
5-times earnings whichis a welcome change after some of the other sectors we’ve covered with shares topping20-times earnings and higher.
Analysts expect earnings to be slightly lowerover the next year but given management’s ability to consistently beat expectations, I think EPS will come out flat at around $7.
50 per share over the next four quarters.
Now as you’re thinking about any of thesehealthcare stocks but especially CVS, understand the rhetoric is going to get hot and heavythe closer we get to the 2020 election.
Healthcare is a hot button issue and railingagainst company profits always plays well with voters.
It’s going to happen from both sides butI’d look at any news-related dips as buying opportunities.
Just look at what regulation has changed inthe past, pretty much nothing, and I don’t think we have too much to worry about forthe near future.
CVS is well covered with 13 analysts providingprice targets here.
We’ve got a low target of $63 a share whichis slightly below the current price and a high of $91 per share for around a 35% gain.
Merck, ticker MRK, is one of the most diversifieddrug makers in the sector with a strong pipeline of drugs in heart disease, cancer, a vaccinebusiness and even sales in the animal-health space.
This is a $212 billion company with operatingcash flow of almost $11 billion a year.
The scale and cash power here is unmatchedby just about any other drug maker which is hugely important when you consider an averageof $800 million to bring a big drug to market.
Merck has a cash flow opportunity with itsKeytruda and Lynparza blockbusters and is using almost $15 billion a year to buy backshares and pay out the dividend.
Shares trade for 16-times earnings but lookat the blowout third quarter they just announced.
Merck beat earnings expectations by 21% overthe quarter.
Earnings are only expected 2.
5% higher overthe next four quarters but given management’s history, we could see the actual number muchhigher than the $5.
23 per share expected.
Merck has largely missed the opioid litigationagainst many of the other drug makers so it could have the opportunity to really speedahead in some key drug segments while competitors are facing uncertainty in the courts.
Analysts have a low target of $89 a sharewhich is just above the current price and a high target of $105 each which would bea 26% return on the shares.
At $26 billion in market cap, Mckesson isthe world’s largest pharmaceutical and medical supply distributor in the world.
For example, with Merck you’ve got a drugmaker and with CVS you’ve got a retail pharmacy.
McKesson is the company that sits in-betweenthe two, negotiating lower prices with Merck and selling to CVS.
Between the three distributors; McKesson, AmerisourceBergen and Cardinal Health, these three companies control over 90% of the distributionbusiness globally.
What I like about McKesson is that it alsohas its own retail pharmacies and an IT infrastructure that helps it manage the supply chain betterthan the other two competitors.
Now of course, this controlling status overpricing between pharmacies and drug makers puts McKesson and its two peers right in themiddle of any fight over drug prices.
It’s unavoidable and there will bound tobe ups-and-downs whenever the issue comes up.
The group has been working through a majorsettlement over the opioid crisis and has enough financial flexibility to negotiateany drug pricing legislation.
Shares trade for 9.
7-times earnings whichare expected higher by 5.
8% over the next year.
Not a huge move but stable and I think justclearing out some of the uncertainty around the opioid litigation will be enough to sendshares higher.
Analysts see the shares at a low around $135over the next year or as high as $169 per share which would be a return of 25% overthe period.
UnitedHealth Group, ticker UNH, is the largestprivate health insurer in the U.
as well as a strong business line internationally.
The company insures 50 million members covering15% of the insured population.
That puts it well above the next largest rivalwith just 10% of the market.
Combine this scale with a strong health informationtechnology business and a pharmacy benefits manager to negotiate costs and you’ve gota business model that can’t be beat.
In fact, the CVS/Aetna and Cigna/Express Scriptsmergers over the last several years were both an attempt to copy the UnitedHealth businessmodel.
Shares trade for 17.
3-times earnings, so alittle more expensive than other stocks on the list but maybe worth it on that remarkablystable earnings growth.
Earnings are expected almost 11% higher overthe next year and will likely be much higher considering management’s history of beatingestimates.
This is another one that could be uncharacteristicallyvolatile around headlines going into the 2020 elections but where the dips could be a buyingopportunity.
For all the talk around government-paid healthcoverage, nobody has a workable plan or a way to pay for it that can get through Congress.
Analysts have a low target around $257 pershare over the next year with a high at $310 a share which would be 24% from the currentprice.
Gilead Sciences, ticker GILD, is another solidstock in the drug maker space with a 4% dividend that beats most others.
Gilead is a leader in drugs treating HIV andHepatitis, two of the highest profit margin markets in drug-making.
In fact, Gilead is so successful in HIV treatmentsthat it serves 80% of the patients in the United States.
Shares trade for 9.
7-times earnings on a PEbasis with earnings expected 4.
6% higher over the next year.
Now that first and fourth quarter, the nexttwo to be reported, have historically been weak for Gilead so you might buy half of yourinvestment now and wait to see if shares fall on a bad earnings release when those reportscome out.
Analysts have a low target at $66 a share, right where the stock is now, and a high target of $95 per share or 45% higher than the currenttrade.
Watch the first video in the series, the besttech stocks to buy now and the factors I used to find stocks in these videos by clickingthe video on the right.
Don’t just follow me into these stocks.
Find out how I picked them and how to findother great investments.
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