Best health care stocks for investors.
The record-long bull market came to a sudden end in the early part of 2020 as the pandemic hit Wall Street. Historically speaking, the health care sector tends to perform well late in the economic cycle and even hold firm in recessions, offering a welcome reprieve in challenging times like the present. As society races for a treatment or cure for the virus, this sector is more relevant than ever. Here are 10 of the best health care stocks to buy for 2020 and a look at how they’ve performed year to date through Sept. 2. For reference, the largest health care sector exchange-traded fund — the Health Care Select Sector SPDR Fund (ticker: XLV) — is up 8.4% this calendar year.
First of the best health care stocks to buy for 2020 is DaVita, a $10 billion Denver-based company with a network of more than 2,700 outpatient dialysis centers. Last quarter alone, DVA provided kidney dialysis treatments more than 97,000 times per day for patients with chronic kidney failure or end-stage renal disease in the U.S. With DVA trading for 12 times forward earnings, analysts expect the company to grow earnings per share at an 11% annualized rate over the next five years — partially driven by a $1 billion tender to buy back its own stock, amounting to about 10% of outstanding shares. Warren Buffett also happens to be a fan of DVA, owning about 30% of the company via Berkshire Hathaway (BRK.B, BRK.A).
DVA year-to-date return (through 9/2/20): +19.2%
Also named one of the best blue-chip stocks to buy for 2020, $200 billion Swiss drugmaker Novartis is a global pharma powerhouse that most health care investors should know well. NVS finished 2019 with 15 different drugs grossing at least $1 billion a year. Cosentyx (plaque psoriasis, psoriatic arthritis treatment) and Gilenya (multiple sclerosis) each grossed more than $3 billion in 2019. This year has brought mixed news for NVS. The company recently saw impressive trial results for its leukemia treatment candidate asciminib, as well as positive but underwhelming phase 2 data for its paroxysmal nocturnal hemoglobinuria treatment. Despite its middling performance this year, the stock still pays an impressive 3.5% dividend and has been routinely increasing its dividend payout since 1996.
NVS YTD return: -2.7%
IDEXX Laboratories (IDXX)
IDXX has more than quintupled over the last five years, and yet it still has room to outperform over the next five. That’s because few companies have the steady growth profile of an IDEXX Laboratories, the unassuming Maine diagnostics company that carved out its niche in the field of animal care. Not all of the best health care stocks to buy for 2020 have to be focused on health care for humans, and the growing demand for pets in the U.S. has led to booming demand for veterinary instruments and software, tests and imaging equipment. IDEXX also makes products for the livestock industry, and though shares aren’t cheap at more than 70 times earnings, analysts expect this growth stock to keep growing, forecasting annualized EPS growth of more than 15% for the next five years.
IDXX YTD return: +55.6%
A list of the best health care stocks to buy for 2020 wouldn’t be complete without AbbVie, a $160 billion drugmaker that was also named one of the 10 best overall stocks to buy for 2020. While AbbVie doesn’t have the growth potential that a company like IDEXX enjoys, ABBV does make the best-selling drug in the world (arthritis and Crohn’s disease treatment Humira). And after its $63 billion acquisition deal for Allergan, it now owns Botox as well. Trading for less than eight times forward earnings and with a 5% dividend, ABBV looks like a good bet for income investors who entered 2020 with few options as interest rates have yet again returned to record lows. Earlier this year, AbbVie hiked its quarterly payout by more than 10%.
ABBV YTD return: +10.4%
Indianapolis-based health insurer Anthem is also one of the best health care stocks to buy for 2020, making the list for a second consecutive year. In simple terms, ANTM stock just trades far too cheaply compared with its peers, boasting a price-earnings growth (PEG) ratio below one, at 0.84. A lower ratio indicates investors are paying less for future growth, and the next-cheapest peer worth more than $1 billion has a PEG ratio of 1.15. Anthem’s prospects look good regardless of who wins the presidential election in November, but the company may benefit more should former Vice President Joe Biden be elected. Biden has vowed to expand the Affordable Care Act and Medicare, which could boost Anthem’s Medicare Advantage business. Analysts expect earnings to compound at a 16% clip for the next five years, and Wall Street expects Anthem’s business to continue to thrive despite the pandemic.
ANTM YTD return: -6.6%
Takeda Pharmaceutical Co. (TAK)
Japan’s Takeda Pharmaceutical has been around since 1781 — far longer than any other company on this list. Still, Takeda has no trouble keeping pace with modern markets, levering up for a megadeal to acquire biotech company Shire for $62 billion in 2018. TAK might not be one of the best health care stocks to buy for 2020, if not for the market’s skeptical reaction to the merger. Shares are still about 40% below TAK’s 2018 levels. Although revenue growth was just 0.9% last quarter, Takeda’s research and development pipeline is promising, with 12 therapies targeted for launch by fiscal 2024 with total potential peak sales of more than $10 billion. TAK is selling noncore divisions to pay down debt and remains on track with its deleveraging plans. Takeda pays a 4.5% dividend and boasts a globally diversified portfolio of drugs for gastroenterology, rare diseases, immunology, oncology and neuroscience.
TAK YTD return: -3.2%
CVS Health Corp. (CVS)
CVS, the $80 billion pharmacy and health plan provider (remember, it snapped up Aetna in late 2018) is a “steady Eddie” that conservative investors can rely on. CVS’ goals aren’t humble: The company aims to transform health care by making it more accessible, personalized and cheaper than ever. During the pandemic, it could be an integral part of society’s eventual rebound. Before the pandemic, CVS began rolling out HealthHubs, store sections featuring health classes, nutrition seminars, dietitian access and other health-focused products and services. Last quarter, CVS blew past earnings expectations despite modest revenue growth, as the health care benefits segment, which encompasses Aetna, saw increased membership but much lower benefit costs as members delayed elective treatments. CVS stock trades for eight times forward earnings and pays a 3.3% dividend.
CVS YTD return: -16.1%
Cigna Corp. (CI)
Interestingly, Cigna was once destined to merge with another company on this list, Anthem, but the U.S. Department of Justice and the courts ultimately blocked it on antitrust grounds, and Anthem subsequently dropped the acquisition. But that doesn’t mean this $65 billion health care stock, which trades around nine times forward earnings, can’t thrive moving forward. Cigna’s Collaborative Accountable Care initiative is an innovation in the industry, financially incentivizing providers for good health care quality and outcomes, and analysts expect 11% compounded earnings growth over the next five years. Wall Street has been spending money hand over fist on growth stocks this year at the expense of less exciting but fundamentally sound stocks like Cigna. As with CVS, Cigna’s profitability last quarter benefited from the slump in elective procedures.
CI YTD return: -11.3%
Intercept Pharmaceuticals (ICPT)
Each of the best health care stocks to buy for 2020 has so far been an established, consistently profitable company with a reasonably predictable business trajectory. Intercept, as a small-cap biotech business, deviates from that model, and its fairly large potential payoff entering 2020 came alongside higher risk. That risk has been on full display this year, as the U.S. Food and Drug Administration rejected Intercept’s treatment for fibrosis due to nonalcoholic steatohepatitis, or NASH. Although ICPT does have Ocaliva, its chronic liver disease treatment, under its belt, the NASH treatment was Intercept’s fastest and most lucrative pathway to expand beyond a one-drug company. The company will keep working toward a NASH treatment, but the timeline and prospects are now far more uncertain. On the brighter side, sales of Ocaliva rose 16% year over year last quarter.
ICPT YTD return: -62.8%
Johnson & Johnson (JNJ)
The last health care stock to buy for 2020 is a familiar name: Johnson & Johnson, the most valuable public company in the sector. In stark contrast to the one-drug ICPT, JNJ is one of the most well-diversified companies on earth, with three business divisions: pharmaceuticals, medical devices and consumer products. The company has increased its dividend payout annually for 58 straight years, and JNJ currently yields 2.7%. A low-growth blue-chip portfolio anchor, JNJ is built to withstand recessions with ease — and with long-term, mid-single-digit growth that’s very difficult to stop. That has stood up in 2020, with patented drugs like Stelara (immunology) and Darzalex (oncology) — each multibillion-dollar growth drivers — growing by 10.1% and 18.8% year over year, respectively, in the second quarter. Sales of medical devices have fallen due to delayed procedures in the pandemic, but the pharmaceutical segment, JNJ’s largest, continued growing last quarter.
JNJ YTD return: +7.5%
The 10 best health care stocks to buy for 2020:
— DaVita (DVA)
— Novartis (NVS)
— IDEXX Laboratories (IDXX)
— AbbVie (ABBV)
— Anthem (ANTM)
— Takeda Pharmaceutical (TAK)
— CVS Health Corp. (CVS)
— Cigna Corp. (CI)
— Intercept Pharmaceuticals (ICPT)
— Johnson & Johnson (JNJ)
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Update 09/03/20: This story was published previously and has been updated with new information.