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Cautious investors are turning over every rock in the equities market in search of stocks that have not only high growth potential, but also a record of resiliency in downturns.
Yet this dual advantage — a good offense and a good defense — really isn’t that hard to find. It’s sitting in plain sight, available perennially in health-care stocks, a sector that has sustained relatively light damage in this bear market.
Health care is the “Energizer bunny” sector, with reliable revenues from continuing high demand.
Much of this demand comes from aging baby boomers, more than 10,000 of whom turn 65 in the U.S. every day. In a nation where about 20% of the gross domestic product is for health care, boomers in particular drive demand for companies across the sector.
This demand scenario is projected to push health-care profits upward over the next few years.
The sector’s EBITDA — or, earnings before interest, taxes, depreciation and amortization — a key measure of earnings strength, grew 5% annually between 2017 and 2019, and remained flat from 2020 through 2021, according to a study this year by McKinsey & Co. But from 2021 through 2025, the study projects, these earnings will grow 6% annually — a 20% increase, producing an additional $31 billion in profits.
Various health-care companies have optimistic growth outlooks for the next few years but, unlike companies in most other sectors, prospects for shares rising aren’t enhanced by a low starting point resulting from heavy bear market price damage. As of Nov. 8, the passive health-care sector SPDR ETF XLV was down only about 7% from its 52-week high, compared with about 20% for the S&P 500 Index.
Here’s a look at six health-care stocks with low-risk fundamentals, reasonable debt, good price-earnings ratios, sanguine growth projections and healthy dividend yields:
- UnitedHealth Group, Inc. (UNH): Plan enrollments at the nation’s largest health-care management company are still growing from the Affordable Care Act, and the company is doing a brisk trade in Medicare Advantage and supplemental plans.
Prospects for this business and Optum, the UNH health-care delivery and services subsidiary producing about 60% of the company’s revenue, have resulted in average analyst projections for earnings per share growth of about 23% annually over five years.
Early this month, shares were trading at about $550, with an average analyst 12-month forward price target of $600 and from CFRA Research, $650.
- CVS Health Corporation (CVS): The nation’s largest pharmacy care company has been focusing on customer engagement in recent years with a targeted new array of health services and products.
A key part of this effort is HealthHUBs, where some stores offer customers visits with nurse practitioners for minor problems and screenings — a model that capitalizes on the difficulty of getting physician’s appointments conveniently. In ramping up this service, the company has taken on scant debt; its debt-to-capital ratio is about 0.47%.
Analysts like the potential of the HealthHUB model to drive drug sales and insurance enrollments in Aetna, which CVS owns. Early this month, shares were trading around $102, with a CFRA price target of $117.
- Abbott Laboratories (ABT): This company is likely to outperform the market next year because of an innovative, diversified product line that’s increasing market share. Abbott has high return on equity, nearly 24%, but growth will likely be dampened next year by a projected 4% drop in sales from declining Covid test revenues.
Nevertheless, the company has a lot of upside from expected gains across all operating segments, with innovations such as the Freestyle Libre continuous glucose-monitoring system for diabetics. Abbott is now marketing a similar system for non-diabetic athletes.
The company also has strong projected growth from cardiac drugs. In early November, shares were trading at around $100, with an average priced target of $117.
- Medtronic (MDT): Sales of this cardio-centric company, savaged by the suspension of elective procedures during the pandemic, are still recovering from demand that remains pent-up. Many of the suspensions defined “elective” quite broadly, creating a backlog of patients waiting not just for hip and knee replacements, but also for heart valves.
Early this month, Medtronic was trading at around $80 a share, but with plenty of room to grow and an attractive dividend yield, nearly 3.2% Projections for growth focus on a broad lineup of new products, including gear for robotically assisted surgery that received regulatory approval in Europe for certain procedures in last year. Average price target: $106.
- Premier, Inc. (PINC), Class A: Less well known to individual investors, despite a $3 billion market cap, Premier is a health-care improvement firm that provides medical and surgical products, pharmaceuticals, laboratory supplies, capital equipment, information technology, food and nutritional products, and clinical engineering and third-party administrative services.
Thus, its well positioned to gain from the overall growth of the sector. Premier has a particularly low trailing price/earnings ratio for this category — recently, as low as 16. Early this month, shares were trading at around $31. Average target: $42.
- Merck & Co. (MRK): From 2015 until 2020, investors awaiting growth from this household pharma name were on a slow boat to China, as shares languished in the $75-$90 range. But in 2020, some Merck products had a great run, and now the company is poised to prosper from cutting-edge drugs for cardiac care, diabetes and cancer, including Keytruda, which fights lymphoma and whose sales of $5.4 billion are up 26% this year.
The company has an improving product development pipeline and stands to benefit from potential new oncological applications for Keytruda and Lynparza, another cancer drug. Merck has a low P/E (about 14), a high dividend yield (nearly 3%), good projected annual EPS growth (more than 12%) and whopping projection for annual return on equity, 43.58%.
Early this month, shares were trading at around $101, just a bit below their year-to-date high. Average target: $105. CFRA’s target: $116.
Like the overall market, many health-care stocks probably won’t embark on a sustained upward trajectory until the market becomes convinced that the Federal Reserve is planning to pause or end the current cycle of increases in the Federal Funds Rate.
However, long-term investors seeking to add or increase exposure to this consistent, resilient sector should be aware that waiting to interpret Fed tea leaves more favorably will probably mean paying higher prices.
— By Dave Sheaff Gilreath, CFP, partner/chief investment officer of Sheaff Brock Investment Advisors and Innovative Portfolios