Healthcare is the second largest sector in the S&P 500. The representation has grown by nearly 5% over the past 10 years as other sectors like Financials, Energy and Materials sectors have more than halved. This is a sector that should have some representation in your portfolio.
Some of the characteristics of the healthcare sector are that they are less economically sensitive, they have global exposure, typically large cap growth companies and are less economically sensitive that the overall market. This is an area that is largely dominated by U.S. companies as well. The opportunity for growth and less cyclicality is a huge bonus.
As you look across the healthcare sector, it is largely trading at more rich valuations. This is where being selective can be important and may lead to better returns over time.
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Some of the considerations for which stocks made the list are financial strength, profitability and near-term upside potential. For financial strength, having lower debt and more cash is an important qualifier. For profitability, having consistent and higher growth and profitability is an emphasis. Finally, The near-term opportunity would come down to a combination of valuation and technical strength.
Check out our other posts on healthcare companies.
The following list of 5 healthcare companies are ones that are a good balance of financial strength, profitability and opportunity. As a result, they represent some of the top companies to consider in this sector.
Healthcare Stock #1: Illumina, Inc (NASDAQ: ILMN)
Illumina has moderate debt with a debt-to-equity of 0.41 and a cash-to-debt ratio of 1.82. The company has fantastic margins with an operating margin of 27.8% and has a 3-year revenue growth rate of 13.6% and a 3-year EBITDA growth rate of 22.4%.
The company is experiencing some near-term headwinds due to COVID-19. The CEO expressed that the company’s business of sequencing and genomics insights is as strong as ever. The company anticipates that they will play an integral role in the global community to prepare for the next pandemic.
Healthcare Stock #2: Abiomed, Inc (NASDAQ: ABMD)
Abiomed is a company with no debt and a current ratio of 5.04. This is an indication that they have adequate cash to meet their current liabilities and with no debt, they don’t have any bankruptcy risk. They generated 29.64% operating margin in the trailing twelve months. They have 3-year revenue growth of 31.5% and 3-year EBITDA growth of 50.4%.
The company offers care to heart failure patients. In a Jun 5, 2020 announcement, they announced that the FDA approved the company’s investigational device exemption application to start an early feasibility study of their Impella ECP heart pump. The impella is the world’s smallest heart pump.
Healthcare Stock #3: Alexion Pharmaceuticals, Inc (NASDAQ: ALXN)
Alexion is one of the better value opportunities on our list. The current values for P/E, P/S, P/B and EV/EBITDA is near the lowest value over the past 10 years. The company has also maintained 42.87% operating margins in the trailing twelve months. They also have a 3-year revenue growth rate of 17.7% and a 3-year EBITDA growth rate of 35.3%.
The company benefited by a patient conversion from Soliris to Ultomiris. They also saw their sales of Soliris grow by 6% as volume increased. In 1Q, they grew their revenue by 27% and saw GAAP and non-GAAP operating margins increase to 48% and 62%, respectively.
Healthcare Stock #4: West Pharmaceutical Services Inc (NYSE: WST)
West Pharmaceutical Services has no debt and a current ratio of 3.1 and interest coverage ratio of 38.73. It’s trading at a higher valuation but has maintained operating margins of 17.01% and net profit margins of 13.8% in the trailing twelve months. The company doesn’t have as high of growth rates with a 3-year revenue growth rate of 6.6% and a 3-year EPS growth rate of 18.9%.
The company announced on May 21, 2020 that the company will be joining the S&P 500. In their 1Q earnings report, the company saw net sales grow 10.8% and diluted EPS grow 36%. WST is a company that manufactures and sells containment and delivery systems for injectable drugs and healthcare products.
Healthcare Stock #5: Biogen Inc (NASDAQ: BIIB)
Of all the stocks on the list Biogen provides one of the best combinations of financial strength, profitability and valuation. The company has moderate debt with a debt-to-equity of 0.51. While it’s cash-to-debt ratio is 0.61, it’s current ratio of 1.73 and interest coverage ratio of 39.69 shows an ability to meet its obligations. The company boasts operating margin of 50.59% and a net profit margin of 40.76%. They have a 3-year revenue growth rate of 13.6% and a 3-year EPS growth rate of 22.9%.
The company beat analyst estimates in the previous four quarters, but analysts are forecasting a revenue decline in 2020 and 2021. In 1Q, the company saw a 1% increase in revenue and a 13% increase in GAAP earnings. In their report, they reported a 9% increase in their core MS revenue of 9%. Because of some of the concerns over future revenue growth, the company is trading near 10-year low valuations.