The best health care stocks to buy for 2021
Health care stocks failed to keep up with the broader market last year, advancing 11% while the S&P 500 as a whole rose 15.9%. Even though the sector has arguably been the most important of the 11 sectors to global well-being amid the pandemic, that trend continued in the first quarter of 2021, with health care stocks rising just 3.3% compared with the S&P’s 5.8% gain. U.S. News’ list of the 10 best health care stocks to buy for 2021 has, through the end of the first quarter, underperformed the wider sector, driven largely by one risky pick that hasn’t panned out. Here’s a look at the top health care stock picks.
Medtronic (ticker: MDT)
Stable medical devices company Medtronic is first up on the list; worth more than $169 billion and boasting a 43-year streak of increasing dividends, MDT is a “set it and forget it” stock. Medtronic managed to remain profitable through the pandemic. The stock rose 1.4% in the first quarter and currently pays a 1.8% dividend yield. Medtronic’s business should benefit as the U.S. emerges from the depths of the pandemic, sparking higher demand for surgeries and the medical devices that are used in them. Medtronic’s investment in robotic-assisted surgeries still promises to be a long-term driver, as that market is primed to grow for years to come.
CVS Health Corp. (CVS)
Entering 2021, CVS was primed to be one of the most important points of distribution for the COVID-19 vaccine, and it hasn’t disappointed. Through April 1, CVS had administered more than 10 million vaccine doses, with the company expecting the pace of vaccinations at its stores to rapidly increase, with the ability to give up to 25 million vaccine doses per month. While the company’s latest quarterly results saw year-over-year net income fall, revenue rose and so did prescription volume. Its role as a vital player in resolving the raging pandemic should earn CVS brand loyalty with consumers, as well as some new customers. CVS rose 10.9% in the first quarter and pays a dividend of 2.6%.
Although Zoetis was down 4.7% in the first quarter, the industry it’s a part of, animal health, is still an incredibly important part of the larger sector that all health care investors should have exposure to. Zoetis, which makes products for both companion animals and livestock, is seeing a boom in demand for its companion animal products as more and more millennials take on pets. Although fourth-quarter revenue rose 8% across the company, companion animal product sales rose 30% in the U.S. last quarter and 17% internationally. Zoetis recently received approval to treat osteoarthritis pain in cats and dogs in the European Union, Brazil, Canada and Switzerland.
DaVita is the largest dialysis provider in the U.S., and a repeat pick from the best health care stocks to buy for 2021. DVA was an outstanding performer in 2020, rising 55%. But the stock price slipped 8.2% in the first quarter of 2021. DaVita’s valuation remains attractive, with the stock trading for just 17 times earnings, and analysts expect fairly impressive earnings per share growth of nearly 14% over the next five years. The greatest investor of all time, Warren Buffett, also believes in DaVita, with his financial holding company Berkshire Hathaway (BRK.B, BRK.A) owning an enormous 33% stake in the Denver-based business.
Big Pharma giant AbbVie is another of the best health care stocks to buy for 2021; and shares of the company, worth more than $190 billion, rose 2.2% in the first quarter. AbbVie owns the most successful commercial drug in the world, an immunosuppressant treating a number of ailments, from arthritis to plaque psoriasis, Crohn’s disease and more. It’s also coming off its 2020 acquisition of Allergan, the company behind Botox, which is its own well-established, long-term blockbuster anti-wrinkle drug. ABBV stock pays a healthy 4.8% dividend, the highest on this list, and is a dividend aristocrat to boot, raising its dividend payout for 49 years straight. ABBV also looks like a solid value stock, trading for less than eight times forward earnings.
Vertex Pharmaceuticals (VRTX)
Biotech Vertex Pharmaceuticals remains one of the most attractive risk-reward opportunities on the list of top health care stocks, trading for a reasonable 21 times earnings with five-year annualized earnings growth expected to come in around 18%. Although the stock is off to a rough start to 2021, shedding 9.1% in the first quarter, VRTX is an important player in health care due to its dominance in the treatment of cystic fibrosis, a congenital disease, which usually affects children. With a very healthy balance sheet, the company’s sales of its Trikafta/Kaftrio treatment jumping from $420 million in 2019 to $3.86 billion in 2020 and overall revenue expected to grow by double digits in the years ahead, Vertex’s long-term outlook still looks as attractive today as it was to begin the year.
Editas Medicine (EDIT)
Editas Medicine is a major player in one of the most exciting areas of health care today: gene editing. The CRISPR gene-editing technology that the early stage Editas uses in its trials has potentially groundbreaking implications in medicine, with many scientists thinking it could help fundamentally eradicate certain diseases if applied correctly. Regardless, Editas is in early stage clinical trials for an ocular drug and a drug focused on sickle cell disease, so there’s no real product revenue at the company to speak of. Shares of the high-risk, high-reward EDIT fell 40.1% in the first quarter as investors increasingly rotated into value stocks and the rise of interest rates hurt growth stories like Editas. Today, the company is worth less than $3 billion, but over the long run, this company has the potential to be worth 10 times as much given the promise in the field.
Johnson & Johnson (JNJ)
Although arguably somewhat boring, the blue-chip Johnson & Johnson remains one of the crucial stocks for every health care investor to own. As one of the most valuable health care companies in the world, JNJ is worth more than $420 billion and has a broadly diversified business across medical devices, consumer goods and pharmaceuticals. It’s not going to set any growth records, but JNJ shares rose 5.1% in the first quarter and the company pays a sound 2.5% dividend. Worldwide operational sales rose 8.3% year over year in the fourth quarter, driven by 16.3% growth in its largest and fastest-growing segment, pharmaceuticals.
Teladoc Health (TDOC)
Telehealth has been an emerging industry for years, but it truly burst onto the scene in 2020 as a sudden pandemic forced shutdowns and social distancing, begging for a service allowing people to keep up with their primary care. Teladoc fit perfectly into that mold, and in 2020, revenue surged 98% year over year with total visits growing 156% to 10.6 million. As with Editas, Teladoc took a hit in the first quarter due to its growth profile and the rise of interest rates; the company also posted a larger-than-expected fourth-quarter loss, however, which helped send the stock down 9.1% in the first quarter.
Cigna Corp. (CI)
The last of the best health care stocks to buy for 2021 is health insurer Cigna, which rose 16.1% in the first quarter. Cigna made the list in a large part due to its compelling status as a value stock, which despite its swift advance, still looks compelling. The Bloomfield, Connecticut-based insurance giant, which boasts an $88 billion market cap, trades for less than 11 times earnings, while analysts expect more than 10% annualized earnings per share growth over the next five years. The company expects revenue to rise modestly from $160.4 billion in 2020 to at least $165 billion in 2021, while the company’s debt-reduction plan has helped boost income, with the debt-to-capitalization ratio of 45.2% falling to 39.5% between 2019 and 2020.
The 10 best 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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Update 04/19/21: This story was published at an earlier date and has been updated with new information.