THE BEGINNER'S GUIDE TO HEALTH STOCKS

One of the realities of the economy is that as an economy grows, people spend more money on healthcare. There are several reasons for this. Firstly, rising incomes mean people can afford to treat more medical issues. People also live longer, meaning there are more medical issues to be treated. In addition, research and development have resulted in more conditions being treatable.

While the healthcare sector continues to grow, it is also very defensive. Healthcare is one of the last things people cut back on during economic downturns.

Investing in healthcare stocks can be a little intimidating because it all seems very complicated, and there are over 900 listed healthcare companies in the US alone. However, if you break the sector down into the various industries, it’s a lot easier. Broadly speaking there are five types of healthcare companies. Here is a description of each industry and a few of the health care stocks to watch in each:

Hospitals and other healthcare facilities

These are the businesses that provide medical care and conduct lab testing and diagnostics. Besides hospitals: clinics, nursing homes and labs fall into this category.

This industry typically generates steady returns over time. Prominent listed companies in the industry include HCA Healthcare (HCA), Universal Health Services, Inc, Encompass Health Corporation (EHC) and Tenet Healthcare Corporation (THC).

Medical devices and equipment

Manufacturers of medical devices and equipment are often overlooked yet play a vital role in the provision of healthcare. Companies in this industry vary greatly. Some manufacture basic instruments like surgical instruments and hospital beds, while others design and manufacture cutting edge machinery using robotics, laser and other technologies.

Medtronic (MDT), Abbot Laboratories (ABT), Intuitive Surgical (ISRG) and ResMed (RMD) are examples of companies in this industry.

Pharmaceutical manufacturers

The multibillion-dollar pharmaceutical giants are the most well-known companies in the sector. These companies own patents on large portfolios of drugs, some of which bring in over $1 billion a month in revenue.

The largest pharma companies in the US are Johnson & Johnson (JNJ), Merck & Co (MRK), and Pfizer Inc (PFE). AstraZeneca Plc and GlaxoSmithKline Plc in the UK, and Novartis AG in Switzerland are also important companies in the space.

In addition, Takeda (TAK), Allergen (AGN), and Zoetis (ZTS) specialize in producing generic pharmaceuticals. This is a lower margin industry but doesn’t carry the expenses associated with R&D.

The large pharmaceutical companies have been very profitable investments over time. However, some of these companies are at risk of pricing regulation from government agencies. This may offer a buying opportunity, but they should also be treated with caution.

Biotech companies

The large pharmaceutical companies each produce a wide range of patented drugs while conducting research on a smaller number. Biotechnology firms engage predominantly in R&D, and usually only have a small number of drugs in the pipeline.

This is the riskiest part of the healthcare sector and companies rely almost solely on investors for cashflow. The process of developing and testing a new drug is expensive and takes a very long time. Most drugs being developed never make it to market, and biotech firms frequently fail.

On the other hand, when a company manages to have a drug approved, they can be all but guaranteed billions in future revenue. Biotech companies trade based on the potential for their drugs to make it to market.

Of the 550 listed US biotech firms, 480 are worth less than $2 billion and 300 are worth less than $300 million. Furthermore, only 50 are profitable and most have no revenue.

It’s advisable to only invest in the smaller biotech firms if you understand the companies very well. However, there are one or two larger biotech companies with a portfolio of drugs in development.  Amgen Inc (AMGN) and Gilead Sciences, Inc (GILD) are the most prominent of these companies.

Health Insurance companies

Health insurers provide private healthcare insurance and health insurance plans for employers. On the one hand, this is an extremely lucrative industry, while on the other hand, the potential for government-sponsored health insurance is a risk.  This risk is generally priced into the stocks in this industry, meaning that returns are usually quite good.

Buying health insurance stocks after a 20% price decline usually pays off over time. UnitedHealth Group Incorporated (UNH), Cigna Corporation (CI), Anthem Inc (ANTM), and Humana (HUM) are the important medical insurance providers.

Big tech enters healthcare

Some of the largest tech companies, specifically Apple, Google, and Microsoft also have their eye on the healthcare industry. If you are looking for healthcare stocks to buy, these companies are also worth considering. Apple is hoping that wearable devices like the Apple Watch will play a role in monitoring patients and helping them live a healthy life. Google and Microsoft are building artificial intelligence applications specifically for researching treatments for diseases like cancer. Even Amazon has its feelers in the industry and is launching its own health insurance company.

Conclusion

For the most part, healthcare stocks should be treated as long-term investments, and buying on weakness usually pays off with the large companies. Unless you really have a lot of knowledge about a company, its best to avoid the smaller and more speculative stocks in the sector. Most of the large companies are available on the CFD share trading platform.

 

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