These are the healthcare stocks to watch now, amid a bumpy recovery

  • Healthcare, long a distressed stock market sector, has recovered in the past six months.
  • Several analysts predict strong performance this year.
  • Healthcare is a defensive redoubt for investors because demand is not affected by the economy.

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Healthcare, long a distressed stock market sector, has recovered over the past six months, with currently robust vital signs and strong growth forecasts.

The recovery comes after the sector failed to meet positive expectations for 2022 based on estimates of pent-up demand for doctor visits and elective procedures following the pandemic.

Healthcare was effectively flat in 2022 and for most of 2023, a year in which the overall performance of the market’s eleven sectors was the third-worst and the S&P 500 grew 26%.

In late 2023 and into the first quarter of 2024, healthcare stocks turned around and rose about 5%, about half the gains of the S&P 500. In mid-April, as the S&P 500 retreated, the healthcare sector rose. has surrendered its first quarter profits.

Still, like the S&P 500, healthcare has risen since the market’s October low, picking up some tailwinds after two years of doldrums for the sector.

Several analysts predict strong performance this year. BlackRock’s view is particularly optimistic: “Over the next twelve months, healthcare earnings growth is expected to exceed all other sectors on an annual basis.”

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One factor driving investment is the broadening of market performance from major technology stocks to other sectors. Amid this ongoing sector rotation, healthcare stocks are now a natural place for money to flow because they are defensive and have historically done well in both slowing and growing economies.

This defensive advantage has led to investment from institutional investors who expect slowing economic growth at this late stage of the business cycle, as the Federal Reserve estimates first-quarter growth at 2.5%, compared to 3% in 2023.

Healthcare is a defensive redoubt for investors because demand is not affected by the economy. People will always need health care, and insured people will generally seek it regardless of what the economy does.

For many people, a slowing economy can lead to less job security, prompting them to spend less. This may mean postponing the purchase of a new car or kitchen remodel, but not medical care.

In addition, baby boomers’ demand for Medicare remains as strong as ever, including those with supplemental plans with relatively low deductibles and co-payments.

The sector is also being driven by a shift in investor sentiment, with buzz surrounding new pharmaceutical products such as GLP-1 drugs for treating diabetes and achieving weight loss, and robotic technology that enables minimally invasive techniques for complex surgeries.

GLP-1 drugs have doubled Eli Lilly’s share price over the past twelve months, bringing its price-to-earnings ratio for that period to a lofty 129. Over the same period, Intuitive Surgical’s robotic da Vinci Surgical System has helped the company grow its stock by 42%, bringing its trailing price-to-earnings ratio to 75.

While these two stocks may continue to do well this year, healthcare companies that likely have more room to grow, as evidenced by their lower valuations, are not in short supply. They can be found in several subsectors, including biotechnology, suppliers/services, equipment/supplies, and life science tools/services.

Here are six stocks with attractive valuations, low-risk fundamentals, good earnings and strong growth forecasts:

  • Abvie (ABBV). This well-known biotech company has an unusually high dividend yield: currently 3.83%. Products include drugs for the treatment of psoriatic arthritis, plaque psoriasis, Crohn’s disease, depression and some cancers. Market capitalization: $286 billion. Price-earnings ratio over the last twelve months: 16.3.
  • Vertex Pharmaceutica (VRTX). This biotech company is a dominant player in the cystic fibrosis therapies market. After the company announced largely positive results from a clinical trial of a non-opioid acute pain drug in January, it said it would apply for regulatory approval by mid-year. The goal is to capture some of the huge market share of opioids, which carry the risk of addiction. Market capitalization: approximately $102 billion. Trailing price-earnings ratio: 28.
  • Stryker Corp. (SYK). This medical device company produces various implants for spinal disorders and joint replacements of knees, hips and shoulders. Stryker is benefiting from continued demand from aging boomers with deteriorating joints. Market capitalization: $129 billion. Trailing price-earnings ratio: 33.
  • Medpace Holdings (MEDP). At 43, Medpace’s trailing price-to-earnings ratio may seem high, but its share price is up 63% in the past six months. Medpace, a contract research organization, provides client companies with expertise and services to help them move new drugs and medical devices through the various stages of development. Market capitalization: $12 billion.
  • Iqvia Holdings (IQV). This biotech company operates at the intersection of healthcare and technology, providing analytics, technical solutions and clinical research services to inform decision-making in hospitals and R&D organizations. P/E: 31. Market cap: $42 billion.
  • Cencora (COR). Although Cencora’s share price is up more than 27% in the past six months, its earnings growth gives this provider of pharmaceutical supply chain solutions and services for the human and animal markets a relatively low price-to-earnings ratio of 26. Market capitalization: $47 billion .

Since 1952, presidential election years have been consistently positive for the market as a whole, especially when an incumbent president is in power. But health care stocks are sometimes an exception, as the sector is a political punching bag for candidates promising to lower costs for consumers. Stock prices can fall due to such rhetoric, creating buying opportunities.

Current projections indicate that investors who buy shares of healthcare companies with good fundamentals and strong market positions now, and hold them through 2025, may be positioned for strong gains.

– By Dave Sheaff Gilreath, a certified financial planner, and partner/founder and chief investment officer at Sheaff Brock Investment Advisors and its institutional arm, Innovative Portfolios. Sheaff Brock Investment Advisors was ranked No. 10 in CNBC’s FA100 rankings.