A long list of overlooked life sciences stocks, fueled by genetic testing and drug research spending, are poised to post strong gains longterm. Those stocks are seen rallying alongside the health care boom and include life-sciences tools and equipment firms such as Illumina (ILMN), the leader in gene-sequencing technology; Thermo Fisher Scientific (TMO), which sells an array of lab tools and equipment; Agilent Technologies (A) and Danaher (DHR), which also sell lab equipment, diagnostic tools, and products outside life sciences; and Bio-Techne (TECH), which makes protein-science kits and new “liquid biopsy” tests, according to a detailed story in Barron’s.

5 Innovation-Led Stocks

·     Illumina; gene-sequencing technology

·     Thermo Fisher Scientific; lab tools and equipment

·     Agilent Technologies; lab equipment, diagnostic tools

·     Danaher; lab equipment, diagnostic tools

·     Bio-Techne; protein-science kits and liquid biopsy tests

‘Healthiest Funding Cycle in Years’

As gene analysis and other technologies open up new markets in healthcare, life sciences companies are ideally positioned because they make lab tools, scientific-research equipment and daily supplies. They also have benefited from a surge in funding from both the private sector and government. Life sciences is “one of the few areas where we see bipartisan support in Congress,” notes Charles Kummeth, CEO of BioTechne.

The National Institutes of Health upped its budget by 5% over last year to $39 billion for 2019. Meanwhile, China is forecast to increase spending on life sciences by 10% per year, on track to exceed the U.S. in spending as a percentage of GDP by the early 2020s. As for the private sector, drug companies are boosting spending on R&D, up 3% per year and estimated to reach $177 billion in 2019, according to Bank of America.

Here's a closer look at two of these stocks.

Genomics Play

Illumina is set to gain from its leadership position in the market for whole genome-sequencing, in which it maintains a more than 75% share. According to Morningstar, over 90% of sequenced genetic material comes from an Illumina machine. Genomics plays a central role in the quest to detect genetic mutations and assess the effectiveness of treatments associated with disease. The company’s widely installed base for whole-genome sequencing is the standard platform for globally funded population studies, in which over six million projects have been announced and only 500,000 have been run, per Leerink Research. Illumina's bulls remain optimistic even though the shares trade at 48 times estimated earnings.

Niche Supplier

Thermo Fisher has managed to post revenue growth by 11% annually over the past five years, reaching $24.1 billion in 2018 through organic growth and acquisitions. The company, which sells a diverse array of products from scientific instruments to consumable materials, says its supplies fulfill “a very specific set of requirements within the industry.” CEO Marc Casper tells analysts that while China is a manufacturing hub and major end market for Thermo, the company isn’t feeling the effect of tariffs, given a large portion of its products sold in China remain exempt.

Thermo's stock also looks attractive from a valuation standpoint, trading at 20 times earnings, below the industry average.

Looking Ahead

It’s important to note that emerging technologies and research can abruptly change the direction of tech-driven companies, meaning that not all of these stocks are a sure bet to prosper longterm. Also, high expectations for the stocks are reflected in rich valuations averaging 25 times 2019 earnings. Any slight earnings miss could send their stocks plummeting.