The best health care stocks to buy this year
In 2020, health care stocks underperformed the broader market, adding 11% while the S&P 500 as a whole rose 15.9%. Although so much of the world’s attention was dominated by a focus on public health concerns — including the frantic search for a vaccine and the shift to telehealth — other parts of the sector struggled through the pandemic as elective surgeries and medical device sales plunged. An expected return to normalcy, a new White House administration and the steady march of innovation are just some of the factors at play for the sector in the year ahead. Here are 10 of the best health care stocks to buy for 2021.
Medtronic (ticker: MDT)
First among the best health care stocks to buy for 2021 is Medtronic, the $160 billion medical devices company offering investors a compelling mix of safety, stability and longer-term growth potential. To the virtue of stability, Medtronic is in rarefied air as a member of the S&P dividend aristocrats list, a slate of companies that have raised their dividend payments to shareholders annually for 25 years or more; MDT is on an uninterrupted 43-year streak. A business behind much of today’s most vital health care technology, with products ranging from pacemakers and insulin pumps to innovations used in brain surgery, Medtronic is also a growing player in the area of robotic-assisted surgeries, a market virtually guaranteed to grow in importance as time goes on.
CVS Health Corp. (CVS)
A repeat member from last year’s list, CVS underperformed the market in 2020, losing about 8%. All of U.S. News’ annual stock picks, however, are made with a long-term mindset, and the thesis for the largest retail pharmacy in the U.S. has scarcely been stronger: CVS will be absolutely vital to the logistics of the vaccine’s rollout in 2021, driving foot traffic, same-store sales and hopefully customer loyalty and prescription revenue as well in the process. Conservatively valued at just nine times forward earnings, CVS shares also pay about a 2.9% dividend. With about 70% of the U.S. population located within 3 miles of a CVS and more than 1,100 walk-in health care clinics called MinuteClinics, CVS is an entrenched part of today’s domestic health care ecosystem.
Not all health care companies have to focus on the human race — in fact, looking after the welfare of other species is a lucrative business, as the 2013 Pfizer (PFE) spinoff Zoetis has proven. An all-in-one solution of sorts, ZTS makes medicines, diagnostics, vaccines dermatology solutions and other health care products for both companion animals (pets) and livestock. The booming market for cats and dogs has been showing up in recent quarters, with revenue jumping 19% in the companion animal space versus 5% in the livestock arena in the company’s most recent quarter. Although nominally a bit pricey at 47 times earnings, investors are paying up for one of the few publicly traded pure plays on animal health.
Another repeat from last year’s best health care stocks to buy list is DaVita, the largest dialysis provider in the U.S. Unlike CVS, DaVita actually enjoyed a stellar performance in 2020 — shares rallied about 55% — and the stock still looks like a steal. It’s hard enough to find quality companies in today’s market trading for less than 18 times earnings, but finding such companies also expected to grow earnings per share by more than 20% annually over the next five years is even rarer. It’s typically not a bad indicator when Warren Buffett’s Berkshire Hathaway (BRK.B, BRK.A) is your single-largest shareholder. Berkshire owns more than 32% of the $12.8 billion DaVita.
The second-largest company among the top health care stocks for 2021 is the $182 billion pharmaceutical giant AbbVie, whose portfolio of billion-dollar drugs — including the world’s best-selling drug, Humira — was beefed up in recent years with the $63 billion purchase of Botox-maker Allergan. With youth forever in style and Botox’s cosmetic injections and strong brand time-tested since its debut in 2002, the strength and diversification of AbbVie’s portfolio is totally unique in pharma. Also named one of U.S. News’ best dividend stocks and blue-chip stocks for 2021, ABBV is another dividend aristocrat, having raised its dividend payout for 48 straight years. Shares currently yield 4.9%, the most on this list.
Vertex Pharmaceuticals (VRTX)
A biotech stock, Vertex Pharmaceuticals has one of the most attractive risk-reward ratios on this list, trading at about 22 times earnings with analysts expecting EPS growth of more than 25% annually over the next five years. Vertex’s leadership in treatments for cystic fibrosis, a hereditary disease that affects the lungs, has never been clearer than it is today. In 2020, an early approval in the European Union for its Kaftrio therapy, known as Trikafta in the U.S., led to a wildly successful product launch — and last quarter, revenue from Kaftrio/Trikafta fell $40 million short of $1 billion, up from zero just a year before. The more well-established Vertex has also partnered with upstart Crispr Therapeutics (CRSP) in a play on the promising field of gene editing as it seeks to address blood diseases like sickle cell anemia and beta thalassemia.
Editas Medicine (EDIT)
Although Vertex is dipping its toes into one of the most promising new areas in health care, gene editing, Editas Medicine is a pure-play on the cutting-edge CRISPR gene-editing technique. The company doesn’t yet have an approved treatment, but its pipeline is full of exciting opportunities to treat rare diseases, which tend to command high prices when approved. A medicine for Leber congenital amaurosis, which affects between two and three out of 100,000 babies and is the leading cause of inherited childhood blindness, is in early clinical trials. Like its rival Crispr Therapeutics, Editas has hematology treatments for sickle cell and beta thalassemia in its pipeline as well. Editas may have the upper hand in intellectual property, as it exclusively licenses certain patents from the Broad Institute, which is currently the front-runner in a long-waged patent war over coveted CRISPR gene-editing patents for eukaryotic cells.
Johnson & Johnson (JNJ)
The largest of the top health care stocks to buy for 2021 is Johnson & Johnson, the $420 billion blue-chip giant. At 25 times earnings, more conservative investors can get a surefire cash cow at a reasonable price; shares pay about a 2.6% dividend and the company uses just 61% of its profits to finance that yield, leaving a comfortable margin of safety and room for future dividend hikes. What makes Johnson & Johnson such a strong core portfolio holding is its diversity across not just business lines, but also geographies: More than 47% of its revenue came from overseas last quarter. The company’s pharmaceutical division is both its largest and fastest-growing, but the stable consumer health segment — which includes staples like Tylenol, Listerine, and the Band-Aid brand — as well as the medical devices segment, primed for a comeback as the pandemic fades in 2021, underscore JNJ’s enviable stability.
Teladoc Health (TDOC)
An all-out growth stock, Teladoc burst onto the scene as one of Wall Street’s hottest stocks and most topical pandemic plays in 2020. With the global population suddenly forced to re-examine its activities in light of the virus, the distanced and often more efficient lure of telemedicine sparked spiking demand for its virtual health care services. Revenue more than doubled, jumping 109% to $288.8 million last quarter, while total visits more than tripled year over year, soaring 206% to 2.8 million in the most recent quarter. A major acquisition of Livongo, a virtual chronic condition management company, for $18.5 billion, shows Teladoc is taking the aggressive approach, seizing market share first and worrying about profitability in the years ahead. Although currently unprofitable, TDOC’s decision to prioritize growth is expected to reap 80% revenue growth in 2021.
Cigna Corp. (CI)
The final member of U.S. News’ best health care stocks is $73 billion health care insurer Cigna, which, at just 10 times forward earnings, trades for roughly half-price compared to the 19.2 forward multiple of the much larger UnitedHealth Group (UNH). The late-2020 launch of Evernorth, a health services division focused on data-driven solutions for employers, governments and health plans — including customers not using Cigna’s insurance — expands CI’s addressable market. Evernorth revenue grew about 20% last quarter, and if it can truly help address big problems like the rising cost of health care, Cigna shareholders will reap the rewards. Cigna repurchased about $2.9 billion of its own shares in 2020 through Nov. 4.
Top health care stocks to buy for 2021:
— Medtronic (MDT)
— CVS Health Corp. (CVS)
— Zoetis (ZTS)
— DaVita (DVA)
— AbbVie (ABBV)
— Vertex Pharmaceuticals (VRTX)
— Editas Medicine (EDIT)
— Johnson & Johnson (JNJ)
— Teladoc Health (TDOC)
— Cigna Corp. (CI)
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