The healthcare sector has underperformed for most of 2019, driven by positive growth in sub-segments such as medical devices, health insurance, hospitals, nursing homes, and pharmaceuticals, which offset losses in biomedical and genetics, home healthcare, medical, and dental supplies. The S&P 500 Health Care Sector is up 10.8% over the last year, underperforming the S&P 500’s 19.1% return.
Healthcare Stocks in 2020
Moving into 2020, as the decade-long expansion in the stock market faces a period of heightened volatility and risk, the health care sector could benefit from a shift towards more defensive sectors. In the sector, this group of stocks has strong balance sheets, attractive dividend yields, and improved cost structure.
Demand should continue to rise for health care products and services, driven by a myriad of factors including an aging U.S. population, increased prevalence of lifestyle-related diseases, the launch of new drugs, and expanding insurance coverage. Meanwhile, the use of artificial intelligence (AI)-based applications, and other next-gen technologies, coupled with an accelerated pace of innovation and M&A activity, will fuel the sector heading into 2020.
On the downside, political rhetoric surrounding the Affordable Care Act (ACA) is expected to contribute to more volatility for health care companies. Overall, large-scale changes remain unlikely in the near term given the divide in Congressional control and the general turmoil in Washington. Volatility should provide investors with opportunities for value—that is, if they're willing to strap in for a roller coaster ride in 2020. Here are five health care companies that could outperform the rest.
1. ABIOMED Inc.
ABIOMED Inc. (ABMD) is a manufacturer of medical implant devices, including the AbioCar artificial heart and Impella. Abiomed, with an $8.4 billion market cap, has seen its shares fall 42% year-to-date as of Nov. 2019. This comes after a successful 2018, where it benefited from its dominance in the cardiovascular disease market, where it sells products used in two major cardiac procedures—cardiogenic shock and protected percutaneous coronary intervention. Over the last decade, Abiomed shares have skyrocketed over 2,000%.
Abiomed's outperformance has been fueled by profit growth in the triple digits, thanks to the burgeoning demand for Abiomed’s miniaturized heart pumps. The firm estimates it has only tapped into a small percent of its U.S. market opportunity, and an even smaller figure for foreign markets such as Japan and Germany. While shares aren’t cheap, trading at 39 times earnings, bulls cite a promising pipeline of products and expected profit growth to justify the valuation.
2. Illumina Inc. (ILMN)
San Diego, Calif.-based Illumina Inc. (ILMN) develops, manufactures, and markets integrated systems for the analysis of genetic variation of biological function. The 20-year-old company dominates its competitors in the booming DNA testing space, where it maintains 90% of the market.
Illumina’s mission is to “crack the code of life” by “mapping” the 3 billion DNA pairs present in humans, offering customers insight into their vulnerability to certain diseases, which increases prevention and diagnosis effectiveness and timeliness. The cost of DNA mapping should lower from roughly $1,000 today, to only $100, according to Illumina.
Since hitting the public market in August 2000, Illumina shares have skyrocketed from their IPO price of $16 to just below $320 as of Nov. 2019. Sales growth should continue to accelerate on-demand for DNA mapping, now the fastest-growing medical test ever in the U.S. and recently eligible for reimbursement via Medicare and Medicaid.
3. HCA Healthcare Inc. (HCA)
HCA Healthcare Inc. (HCA), formerly HCA Holdings Inc. is a holding company that was incorporated in 2010. Through its subsidiaries, HCA Healthcare owns and operates hospitals and related healthcare entities.
HCA shares are up 14% year-to-date as of Nov. 2019, thanks to higher admissions and improved payor and service mix. Other positive tailwinds for the company include an expanding market share thanks to a series of recent acquisitions. Meanwhile, a strong balance sheet, free cash flow, and improved guidance from management have boosted investor confidence. Bears remain wary of high operating expenses and thus the potential for margins to fall, as well as higher growth-related spending, which could weigh on HCA’s debt.
4. Boston Scientific Corp. (BSX)
Boston Scientific Corp. (BSX) is a manufacturer of medical devices used in interventional medical specialties, such as stents that hold open damaged blood vessels.
In 2018 the medical device leader announced it would buy Britain’s BTG Plc for 3.3 billion pounds, or $4.2 billion, marking its largest deal since 2005. Shares initially plunged on news of the acquisition, which is set to broaden the firm’s reach into the market for the treatment of cancer and other diseases with new products.
On the other hand, the deal added to the firm’s debt load, and likely take the company out of consideration as a takeover target itself. Shares are up 23% in the last year, despite a period of heightened volatility for the stock, and have grown nearly 230% over five years.
5. Edwards Lifesciences Corp. (EW)
Edwards Lifesciences Corp. (EW) is a $51.3 billion market cap manufacturer of tissue heart valves and repair products. Shares of the medical device maker have spiked 60% year-to-date, outperforming industry peers thanks to a burgeoning demand for its next-gen tech-enabled products, including its AI-powered devices.
Edwards Lifesciences recently collaborated with San Francisco-based Bay Labs to apply AI to cardiovascular imaging. Through building out and improving its offerings, Edwards Lifesciences can better serve the near 100 million U.S. adults living with some form of cardiovascular disease or the after-effects of stroke.