The health care sector is massive. According to Statista, more than $2.6 trillion is spent on health care in the United States every year. According to the Bureau of Economic Analysis, the entire U.S. gross domestic product (GDP) for 2020 came in at $20.93 trillion, meaning the health care industry accounts for more than 10% of GDP.
In other words, more than 1 in every 10 dollars spent in the United States is spent on health care. That’s colossal.
There are huge opportunities in a market this large. When trillions of dollars are being spent, you can bet there are plenty of companies listed on the stock market making millions or billions of dollars per year that you can invest in.
Best Health Care Stocks to Buy in 2021
Like any other sector, to achieve the goal of generating growth in the health care sector, you’ll need to make educated decisions and pick the right stocks at the right times.
Some stocks will see gains while others will experience losses. It’s important to take the time to get an understanding of the health care space, what makes companies within the space profitable, and the investment opportunity that surrounds the stocks you’re interested in before making any investments.
Below are a few stocks I believe represent some of the largest opportunities in the health care sector today.
1. CVS Health Corp (NYSE: CVS)
If you live in the United States, you’re probably familiar with CVS.
It’s one of the largest pharmacy chains in the world. It has close to 10,000 locations across the U.S. and employs more than 36,000 pharmacists, physicians’ assistants, and nurse practitioners. In total, its workforce numbers more than 300,000 people.
The company’s second-quarter financial results showed just how strong CVS is:
- Earnings Per Share: During the quarter, analysts forecast that CVS would generate earnings per share (EPS) of $2.06. The company blew that figure away, actually reporting EPS of $2.42, coming in more than 17% ahead of what analysts expected.
- Revenue: During the quarter, the company generated $72.62 billion, beating analyst expectations of $7.3 billion. Moreover, the figure showed a staggering growth rate of more than 11% year over year.
- Increased Earnings Guidance: Due to the blowout quarter, the company increased its earnings guidance for the full year. Now, instead of expecting $7.56 to $7.68 per share in full-year EPS, the company said it expects to generate between $7.70 and $7.80 per share. Analysts expect full-year earnings to come in at $7.78 per share.
- Cash Flow: The company continues to expect cash flow from operations for the full year to range from $12 billion to $12.5 billion.
Those are exciting numbers, but they’re not the only reason to be excited about the stock.
Throughout the vast majority of the company’s history, CVS was a standard pharmacy, making money by providing access to prescription drugs and selling impulse-buy products like candy and soft drinks at checkout.
Today, the company is changing, working to become a full-service health care operation. Rather than simply offering you a place to get your prescription medications when you’re sick, the company is moving into the health insurance and administration sectors, expanding its potential to generate significant growth ahead.
With stores in close proximity to the vast majority of Americans, CVS is becoming a key player in the administration of the COVID-19 vaccine, which is a major opportunity the company isn’t leaving on the table. For every coronavirus shot the company gives, it makes a profit of about $15. Considering the overwhelming demand for these vaccines, that adds up to billions of dollars!
At the end of the day, CVS is doing what it’s known to do best. The company grew to nearly 10,000 locations across the U.S., generating billions of dollars in revenue by innovating and creating a compelling consumer experience.
Now, that experience is expanding, with the company dabbling in a wide range of services across the health care sector to become a powerhouse to be reckoned with.
All in all, CVS Health stock is one to watch closely.
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2. Johnson & Johnson (NYSE: JNJ)
Prior to the COVID-19 pandemic, when you thought about Johnson & Johnson, one of the first things that came to mind was likely baby powder and child-friendly shampoos. While its consumer staples arm is important to its bottom line, the company is far more than your average consumer staples company.
Johnson & Johnson is a full-scale biotechnology company that develops vaccines and pharmaceuticals for the world’s most pressing conditions. In fact, the company has a portfolio of therapeutics on the market today approved by the U.S. Food and Drug Administration (FDA) to address 20 indications including cancer, epilepsy, Alzheimer’s disease.
For example, its multiple myeloma treatment Darzalex generated $692 million in sales in 2020, up 42.4% year over year. Imbruvica, the company’s treatment for B-cell cancers, saw 17% year-over-year revenue growth to come in at $492 million.
The company’s biggest winner, the plaque psoriasis and psoriatic arthritis drug Stalera, generated $1.5 billion in sales in 2020, growing 20.6% on a year-over-year basis.
Not to mention, it was one of the first companies to bring a COVID-19 vaccine to market — yet another multibillion-dollar opportunity.
That opportunity is expected to grow, as experts point to a need for boosters eight months after consumers become fully vaccinated. In fact, many believe that boosters will continue to be necessary on a regular basis for the foreseeable future, which means significant and consistent revenue ahead for JNJ.
At the same time, many believe the stock remains undervalued due to headwinds in the company’s medical device segment experienced throughout 2020.
With little access to elective surgeries and consumers going to the doctor less, surgical equipment, orthopedics, and vision products fell on hard times, although they were offset by growth in therapeutic and consumer staples sales.
Nonetheless, with vaccines making their way into arms across the U.S., this trend is likely to reverse quickly, resulting in further revenue growth for the company.
No matter how you slice it, Johnson & Johnson is one for the health care investors’ playbook.
3. Teladoc Health (NYSE: TDOC)
Teladoc is a COVID-19 play as well, but they don’t create vaccines or treatments. Instead, this is a health care technology company. The company’s claim to fame is an on-demand service that connects patients to doctors, therapists, and other medical specialists online rather than in person.
The technology is nothing new. Teladoc has been around since 2002. However, the company faced a barrier.
Many patients — especially elderly patients and those with preexisting conditions — didn’t like the idea of seeing their doctors on computer screens. They wanted face-to-face interaction and didn’t see any value in avoiding the commute to see a doctor over the computer.
That has changed for many of these high-risk patients as a result of the COVID-19 pandemic. With patients being afraid to leave their homes but still needing access to medical services, Teladoc appointments quickly became the norm.
Some naysayers suggest that once COVID-19 vaccines are available and the fear is in the past, Teladoc won’t be quite as lucrative. In fact, these fears, combined with competition-related fears, have driven the stock’s price down by more than 50% since the highs experienced in February of this year.
Nonetheless, these declines may be pointing to a significantly undervalued opportunity.
Remember that people said online shopping would never become popular. Consumers like to touch and feel products before buying them. But today, Amazon is one of the world’s largest companies, and it’s continuing to grow.
When people are exposed to something they think will be uncomfortable but find that it’s actually quite appealing, the new concept often becomes the norm. There’s a good chance that this is the direction the health care industry is going.
Many people like not having to leave their homes to go to the doctor’s office. So, even when COVID-19 is behind us, the telehealth trend will probably continue. That will bode well for Teladoc and its investors, making the stock one for the books.
At the same time, there’s a significant undervaluation at play. Earlier this year, when Walmart agreed to acquire a rival telehealth provider, TDOC stock fell from close to $300 per share to around $130 per share in a matter of a couple of months.
Nonetheless, the dramatic declines set the stage for a compelling opportunity. Movement in the stock market tends to happen through a series of overreactions. Sure, Walmart isn’t a company you want as a competitor, but as a leader in telehealth, Teladoc is well ahead of the competition and is likely to stay that way.
The stock’s steep decline was clearly an overreaction and one that creates a significant opportunity for value investors.
All told, Teladoc stock should be on your watchlist.
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4. Pfizer (NYSE: PFE)
When investors think of big pharma, Pfizer is one of the first names that come to mind. Founded in 1849, it is one of the oldest and largest pharmaceutical companies in the U.S.
While Pfizer has long been popular among investors, it became a household name among consumers as well as part of the Pfizer/BioNTech collaboration that received the first FDA approval to market a COVID-19 vaccine.
Of course, the vaccine is generating significant revenue for the company, which is exciting, but it’s not the most compelling aspect of the investment thesis here.
Ultimately, the vaccine is just one of several medical products the company has brought to market through more than a century of service to the health care community and the patients it serves.
If you think Johnson & Johnson has some hits, you should see the revenue generated by some of Pfizer’s biggest hit products, including:
- Ibrance. Ibrance is the company’s HR-positive HER-2 negative breast cancer treatment and its biggest revenue generator as of 2020. The company brought in almost $5.4 billion in revenue through the sales of the drug that year.
- Lyrica. Lyrica was developed as a therapeutic to treat muscle pain, and it’s indicated to improve symptoms for pain associated with a rare condition known as fibromyalgia. In 2020, the drug generated revenues of $3.3 billion.
- Lipitor. Lipitor is the company’s cholesterol and triglyceride treatment, and another smash hit under the company’s belt, generating around $5 billion in revenue last year.
No matter where you look in the world’s most high-value pharmaceutical indications — whether it be oncology, immunology, or cardiology — you seem to find a drug developed and marketed by Pfizer.
That kind of leadership is nothing to shake a stick at.
At the same time, the company is known for showing its appreciation to investors by way of annual increases to its dividend payments, which have grown since 2013, according to Nasdaq.
With growing sales, growing dividends, and a proven ability to develop smash hit products in the pharmaceutical industry, it’s not hard to find reasons to consider investing in the company.
5. AbbVie (NYSE: ABBV)
With a market cap of well over $213 billion, AbbVie is another of the largest pharmaceutical companies in the world.
The company’s claim to fame is a drug known as Humira, which has been approved to treat 16 different conditions, many of which are incredibly high-value indications including rheumatoid arthritis, Crohn’s disease, juvenile Crohn’s disease, and ulcerative colitis.
The drug is such a big hit that it generated more than $19 billion in revenue in 2020, and it’s expected to see growth through 2021 and 2022. However, it’s also a double-edged sword, and likely the reason the stock is trading at a low valuation compared to its peers in big pharma.
Humira enjoys market exclusivity in the United States until 2023, after which generic versions of the drug can be produced, cutting into the company’s profitability.
Although revenues from the drug are expected to decline during that period, the company is preparing to offset the declines, projecting revenue growth in 2024 and beyond. Growing sales across the company’s robust portfolio of products will help to offset the expected hit to Humira revenue in 2023.
All in all, this is an opportunity.
Over the past several years, AbbVie has generated stellar revenue and earnings growth, which has led to increases in its stock price, making it a great play for the growth investor. In fact, earnings have experienced double-digit growth for the past six consecutive years, and the company doesn’t expect that trend to fall apart any time soon.
At the same time, fears surrounding the loss of Humira exclusivity in 2023 have held the stock’s valuation below the fair market values seen among some of its peers, making it a great option for value investors as well.
No matter how you look at it, AbbVie stock is hard to ignore.
6. Vertex Pharmaceuticals (NASDAQ: VRTX)
With a market cap of around $52 billion, Vertex Pharmaceuticals is a massive company, but it still has plenty of room for growth.
Vertex Pharmaceuticals is a biotechnology company founded in 1989. While it doesn’t have the longevity of the likes of Johnson & Johnson or Pfizer, the company has quickly proven it has what it takes to compete with the big dogs in the health care space.
The company’s claim to fame is its work in cystic fibrosis and its leading drug known as Trikafta. While Vertex does market other drugs as part of its cystic fibrosis franchise, Trikafta is the clear winner, generating more than $3.8 billion in revenue for the company last year, and that number is expected to grow exponentially ahead.
Nonetheless, the stock is trading at a significant discount to last year’s prices, largely due to a mishap in a clinical trial that led to investor fears that the company won’t be able to produce blockbuster treatments outside of its cystic fibrosis franchise in the future.
The mishap took place in an AAT deficiency trial where the company’s candidate, VX-814, resulted in dangerous levels of liver toxicity, leading the company to discontinue the trial.
As such, VX-814 is sitting in the scrap pile, and there are questions as to whether the company will be able to produce new, effective treatments in the future.
As is often the case in the stock market, the mishap seems to have created an opportunity. When the discontinuation of the clinical trial was announced, the stock fell like a brick. But, as mentioned above, market reactions tend to be overreactions.
In this case, the overreaction led to a price-to-earnings (P/E) ratio of below 18, suggesting a significant undervaluation, especially considering that, according to CSI Market, the average P/E ratio across the biotech sector is around 64.
The bottom line here is simple. Investors were hurt by the declines in the stock when VX-814 was scrapped, but that reaction was significantly overblown. Considering current valuations, VRTX is trading at a discount, even if the only thing it has going for it is its cystic fibrosis franchise, which is expected to grow considerably ahead.
All in all, if you’re looking to get in on a discount and tapping into serious growth potential, now is the time to consider VRTX stock.
7. Intuitive Surgical (NASDAQ: ISRG)
Intuitive Surgical is a medical equipment company. As its name suggests, it’s focused on surgical systems — in particular, surgery robots.
The company’s claim to fame is helping surgeons be more precise by literally taking the surgery out of human hands and putting a robot in the surgeon’s place. While that may sound like something out of a science fiction movie, the company’s robots are involved in a new surgery about every 30 seconds.
The company’s robotic system is known as Da Vinci. The Da Vinci system is used in various general surgeries as well as in urology, gynecology, and several other specialties.
Of course, a robot that helps perform surgeries comes with a hefty price tag, generating about $2 million in revenue for the company with each sale, and sales are booming. In 2020, the company sold 936 systems, even during a time when the COVID-19 pandemic led to a massive reduction in the number of surgeries being performed.
While sales during the COVID-19 pandemic were impressive, they actually represented a decline of just over 2% from the year before. Nonetheless, this sets the stage for a significant rebound.
With vaccines becoming widely available and hospitals and surgical centers reopening their doors for elective surgeries, there will likely be a flood of consumers that have been waiting for an opportunity to go under the knife, meaning that the surgery industry as a whole is likely to see explosive growth ahead.
This bodes well for Intuitive Surgical, setting the stage for tremendous growth ahead and making the stock yet another for the watchlist.
Investing in the health care industry isn’t only rewarding from a financial standpoint; it can also be rewarding from a social and ethical perspective. Few activities feel better than making money while simultaneously helping others.
While there are plenty of benefits to investing in the health care sector, there are also plenty of risks. As a result, it’s important to do your research and get a full understanding of just what you’re investing in before you throw your dollars in the ring.
Nonetheless, if you make the right decisions in the health care space, they have the potential to generate tremendous gains.
Disclosure: The author currently has no positions in any stock mentioned herein nor any intention to hold any positions within the next 72 hours. The views expressed are those of the author of the article and not necessarily those of other members of the Money Crashers team or Money Crashers as a whole. This article was written by Joshua Rodriguez, who shared his honest opinion of the companies mentioned. However, this article should not be viewed as a solicitation to purchase shares in any security and should only be used for entertainment and informational purposes. Investors should consult a financial advisor or do their own due diligence before making any investment decision.