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Healthcare stocks have been on a rage lately in 2020 and obviously for a good reason. Owing to the pandemic and the rising demand for quality healthcare across the spectrum are major reasons behind the growing predominance of healthcare stocks as viable investor options. To put an instance in front of you, during the earlier bull run between the years 2009 and 2016, the S&P BSE Healthcare Index made a jump of a whopping 6 times in only 7 years. This indicates CAGR (compound annual growth rate) of an unbelievable 30%. Even though the momentum slowed down a little over the four years that followed, the 11-year mark for CAGR still remains at a handsome 14%.
In recent times, pharma and healthcare stocks are once again firing up owing to the ongoing pandemic and investors are wondering whether this indicates another upcoming bull run in the share market. Experts feel that exports made to the United States and Indian domestic sales market are major growth drivers behind the growth and they have picked up over the last few quarters as well. They feel that the pharmaceuticals and healthcare sector were anyway reviving prior to this pandemic across the domestic and global markets alike. Higher spending from the private and public sectors is anticipated for the healthcare industry. The overall outlook is strongly positive as well. Deloitte has already forecasted global healthcare expenditure increases of 5.4% by the year 2022, touching $10.059 trillion in all.
These facts and figures certainly make investments seem extremely lucrative in healthcare stocks right now. If you take the S&P 500 index into account for example, you will see healthcare stocks ranking at the third spot after the finance and technology sectors. However, you should choose healthcare stocks on the basis of thorough research and analysis.
Companies/types of entities you can choose from
You can choose stocks of various entities/companies involved in the healthcare space. These include the following:
● Pharmaceutical Companies- These are companies that manufacture a majority of OTC (over-the-counter) and prescription based medicines/drugs. Pharma firms, especially the bigger ones, have lower vulnerability as compared to smaller peers. These companies invest a sizable portion of capital reserves into R&D (research and development). Whenever a pharma company releases any new drug with major future potential, the stock will automatically do better. There are several big or large-cap pharma companies that you may invest in. However, make your choice based on parameters like the scope of the drugs to be released, the scale of people to be impacted by the same, substitutes and competitor drugs, IPR, profit/revenues forecasted, overall company reputation.
● Healthcare Service Providers- This is another core component of the healthcare industry. Bigger providers and brands will automatically offer more stability in terms of investment returns and lower risk levels. Hospitals, clinics, diagnostic centers, treatment facilities and even companies offering in-home or mobile healthcare come under this category. Medical or health insurance companies are vital stakeholders in this segment as well. Analyze the medical loss and cost ratios prior to investing in such stocks of the sector. Insurance stocks may offer comparatively lower volatility in comparison to hospital stocks.
● Medical Devices- Stocks of companies manufacturing and distributing medical devices are also good options to invest in. With growing life expectancy, medical devices are assuming greater importance in today’s times. The growth rate is usually lower for medical device companies and products may cover anything from plain bandages to artificial limbs or digital blood pressure mapping tools to stents and more. A major chunk of capital at these companies is deployed on research and development (R&D) and there are several big and small players in this sector. Even robotics and AI are major disruptors in this space. You should study the technology on offer carefully before investing along with looking at competitors of any firm, substitute products and adoption rate. That is how you should be choosing stocks in this segment.
● Biotechnology- Investments made in stocks of biotechnology companies may offer handsome returns in the long run although the risks could be higher as well. You may look at investing in stocks of organizations that are deeply involved in research and development (R&D) for treating terminal and chronic ailments including AIDS, cancer, neurological ailments, heart disease, immunological diseases, tissue and stem cell regeneration, and viral infections. Such projects, if successful, will positively impact stocks and you may consider companies with solid collaborative support networks. Biotech company stocks that are nearing the end of R&D procedures or awaiting a regulatory go-ahead from requisite authorities are other good options.
● Healthcare ETFs- If you are not sure about investing in individual stocks of healthcare players, ETFs could also be good solutions. These are tailored to monitor the performance of the healthcare industry and cover insurance, managed-care entities, treatment providers, and pharmacy benefits management among other verticals.
Some tips on finding the very best healthcare stocks
You should always create your own checklist for investing in healthcare stocks if you are eager to tackle a more volatile market for the sector at large. The parameters that you should assess include overall prospects of future growth, financial strength of a firm, dividends, and valuations. Do not only look at the yields and dividends possible from healthcare stocks. You should at least go into the possibility that companies will be able to keep paying up dividends at current levels as a minimum.
A vital metric for ascertaining the same is the payout ratio which tracks dividends as the percentage of overall earnings. There are various methods that you can use for tracking financial strength of specific stocks including earnings growth, revenues, the cash position of a company, cash and cash equivalents, short-term investments if any, and so on. One of the best ways to determine overall financial position or strength is the FCF or free cash flow which is being generated. This tracks the cash that is left as surplus after paying all capital and operating expenses.
Another parameter that is used for working out stock values is the P/E ratio or price to earnings ratio. Yet, since several healthcare stocks are ensuring swift growth, historically analyzing P/E ratios may not be a good way to start. Instead, rely on the forward P/E ratio which depends on earnings that are estimated approximately one year into the future. The PEG (price to earnings to growth) ratio, that accounts for projected earnings and growth rates over a period of 5-6 years, may also help you in this regard. However, be wary of estimates turning out to be either too high or too low at times. Following all these steps and investing some time into the process will help you immensely when it comes to choosing the best healthcare stocks.
