Top 5 Healthcare Stocks in 2023

Top 5 Healthcare Stocks in 2023

UPDATED Jun 16, 2024

Many investors agree that health is true wealth. But this motto can be taken figuratively and literally for investors who pursue investments in the healthcare sector.

Healthcare is one of the more complex sectors that is made up of different industries. It covers anything from pharmaceutical research & development to health administration, real estate, and even insurance. Investors should understand that these specific industries are quite unique in how they operate and the risk that’s associated with them.

Generally, the health care services and health insurance industries are more stable and carry less risk than the biotech industry at the trade-off of lower growth opportunities.

The Healthcare sector is typically described as a defensive sector with positive growth. As our need for health care is persistent, health care stocks generally have low correlation with global macro conditions, an aspect that has made it one of the strongest performers in recessionary periods.

Meanwhile, the element of positive growth comes from developments such as rising longevity worldwide, technological advances, and personalized medicine. Long-term health trends - be it positive or negative - also tend to provide growth opportunities for the healthcare sector. The obesity and diabetes epidemics in the West and the global aging population trends are examples of trends that are negative for the overall well-being of the population but lead to increased funding and patient growth in healthcare.

Below is a mix of companies that are well-positioned within the healthcare industry to service the above mentioned long term trends.

5 companies

Operates as a health benefits company in the United States.

Why ELV?

Diverse healthcare provider with a speciality in dialysis care.

Fresenius Medical Care (FMC) is a specialist healthcare company providing dialysis care and related services in Germany, North America, and internationally. FMC is one of four divisions of Fresenius SE, which owns 30.8%.

Other divisions include Fresenius Helios (the largest hospital operator in Germany), Fresenius Kabi (drug & medical equipment supplier), and Fresenius Vamed (health care facility business).

FMC has a strong global presence in over 150 countries and 4,200 outpatient dialysis clinics. It strongly focuses on the US (70% of its facilities), with a market share of over 38%. Dialysis is a technique used to treat the abnormal functioning of kidneys, and its global market was worth US$116B in 2022, with a projection to grow to US$160B by 2030. Although not significant, those are stable levels of growth - over 4% per year.

Meanwhile, the company is modernizing the business, moving towards home treatments by as much as 25% by 2025. Home treatments are preferred by patients and are shown to improve various symptoms. If Fresenius is able to differentiate itself from its competitors through this home treatment approach, it should begin to see some organic growth as new patients seek treatment through their services.

Fresenius Medical Care recently implemented a new organizational structure divided into two global segments: Healthcare Products and Healthcare Services. The restructure was undertaken to increase transparency and streamline the governance structure to allow for faster decision-making and ultimately drive more value to shareholders.

Like most companies on this list, Fresenius should benefit from the long-term aging population trend. Health care service needs are greater in older populations, so the expectation is that - all things constant - this should be a fairly strong tailwind for the business.

The company doesn’t have the most conservative debt profile, but it is within the investment-grade levels and slightly improving over the last 5 years. Its dividend is moving in line with the industry, and it is rather stable and with a reasonable payout ratio – indicating the space for growth in the future.

Rewards

  • Trading at 59.6% below our estimate of its fair value

  • Earnings are forecast to grow 12.16% per year

  • Earnings have grown 8.5% per year over the past 5 years

Risks

  • Significant insider selling over the past 3 months

View all Risks and Rewards

Abbott Laboratories, together with its subsidiaries, discovers, develops, manufactures, and sells health care products worldwide.

Why ABT?

Medical device leader broadening their moat with new offings targeting chronic conditions.

Abbott Laboratories is a diversified healthcare operator with a global reach. Despite its origin and presence in the US of over 120 years, the company generates 70% of its revenues abroad. It is also one of the most consumer-facing large healthcare companies, with half of its sales directly to consumers and patients.

It operates through 4 segments: Established Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Medical Devices.

In the last several years, Abbott grew revenue per share at an impressive CAGR rate of 20%, although we have to note that some of that growth is attributed to the COVID-19 pandemic and its testing capabilities. Still, there are new developments to support the continuous growth thesis, including 2 new Amplatzer cardiac devices, new medicines like fast-acting ibuprofen (Brufen Rapid), NeuroSphere Virtual Clinic (remote treatment of chronic pain and movement disorders), and a partnership with WeightWatchers for diabetes support.

Abbott reported Q4 2022 sales of US$10.1B, a 12% decline on a reported basis and a 6.1% decline on a constant currency basis. This is largely attributed to a decline in sales related to COVID-19 testing. Excluding COVID-19 testing-related sales from the figures gives a year-on-year decline of 1.4% on a reported basis and a 5.4% increase on a constant currency basis showing that even though post-COVID figures are weaker, there’s still some underlying organic growth.

Abbott’s Medical Devices segment is their largest by revenue and they’re looking to add strength to its device portfolio with the recent approval of Navitor, a aortic stenosis treatment device, Eterna, a chronic pain treatment device and Aveir, Abbott’s leadless pacemaker.

In the 4th quarter of 2022 alone, Abbott’s sales of its Diabetes monitoring device Freestyle Libre topped US$1.1B, which saw US sales growth of 40% year-on-year. Studies have shown that the percentage and number of diabetes diagnosed individuals has been climbing significantly over the years as a result of lifestyle changes and improved diagnosis. This trend should help provide Abbott with a growing moat in the diabetes monitoring space provided they maintain their position as the world’s smallest and thinnest wearable glucose sensor.

Abbott has a strong financial position, boosting a healthy balance sheet and sparse use of leverage that can be easily repaid from its cash flows. The company’s conservative use of capital and reluctance to rush into M&A deals to accelerate its growth is a good sign.

Finally, the company is paying a dividend and buying back its shares, returning most of its cash flow to shareholders like many other healthy mature companies.

Rewards

  • Trading at 8.1% below our estimate of its fair value

  • Earnings are forecast to grow 11.29% per year

Risks

  • Significant insider selling over the past 3 months

View all Risks and Rewards

Provides healthcare services in the United States and internationally.

Why MCK?

Pharmaceutical distribution company cutting costs and broadening their network.

McKesson Corporation is a healthcare services company operating since 1833. Its structure includes four segments: U.S Pharmaceutical, International, Medical-Surgical Solutions, and Prescription Technology solutions.

McKesson is the largest out of 3 major drug distributors (the other 2 being Cardinal Health (NYSE:ABC) and AmerisourceBergen (NYSE:ABC). The company focuses on being a middleman between drug and medical supply manufacturers and hospitals. It isn’t the most exciting business model, but it is reliable and without research & development or manufacturing risks. Still, for many institutional investors – boring & reliable is precisely what they’re looking for. Thus, Warren Buffett became McKesson’s 6th largest shareholder in early 2022.

Currently, the company seems to be holding onto the positive momentum, expanding its distributorship partnership with CVS Health, and acquiring 2 prospective businesses in GenoSpace and RxSavings Solutions.

Being a pharmaceutical distributor, the company has quite a low profit margin, which came in at 4.50% in Q4 2022, down from 5% in the same quarter of 2021. Owing to the nature of the business, it’s difficult to expand margins through higher sale prices, but one thing the company can do is improve earnings by reeling in operating expenses.

The company has strategically divested certain UK and EU assets as a measure to cut ongoing operating expenses. While we did see operating expenses as a percentage of revenue fall from 4.56% in the fourth quarter of 2021 to 2.74% in the fourth quarter of 2022, the operating expenses from 2021 do include charges relating to the disposal of these international assets and so the results aren’t wholly representative of the cost cutting measures. However, moving forward into 2023, we should see an improvement in net profit margin as a result.

Finally, McKesson has the potential to become a solid dividend payer. Its dividend is not notable, but it has been steadily growing at an annual rate of 10% - easily outpacing inflation. With just 7% of the cash flow paid out, there is more than enough space to accelerate this growth and return more value to its shareholders.

Rewards

  • Trading at 54.8% below our estimate of its fair value

  • Earnings are forecast to grow 9.63% per year

Risks

  • Has a high level of debt

View all Risks and Rewards

Provides medical and specialty insurance products in the United States.

Why HUM?

Health insurance provider securing lucrative contracts with the Defense Health Agency.

Humana Inc. is one of the largest health insurance companies in the US. The company offers government-subsidized plans, focusing on the elderly segment – as it is the largest domestic home health and hospice provider. The firm operates through 3 segments: Retail, Group and Specialty, and Healthcare Services.

The company is attracting a lot of interest due to 2 key factors: its resilience against market downturns and its growth prospects. The stock boasts a rather low Beta of 0.47 - on average, it moves less than half than the general market while doing well in 2022 despite the broad market weakness.

Furthermore, the aging domestic market offers growth prospects as there are more Americans eligible for subsidized insurance plans like Medicare Advantage. Additionally, Humana is close to finalizing a major contract with the Defense Health Agency for the East Region. The contract to provide health, medical and administrative support to uniformed services members and their eligible family members is worth US$70.85b over 9 years. The company boosts a healthy balance sheet with more cash than total debt; thus, it can easily take advantage of those growth opportunities.

Humana doesn’t have a significant dividend, but its growth has been steady, tripling over the last 10 years. The management prefers to return value through buybacks, but they have a lot more leeway to increase the dividend as it has the lowest payout ratio among the peers at only 14% of earnings.

Rewards

  • Trading at 62.6% below our estimate of its fair value

  • Earnings are forecast to grow 14.18% per year

Risks

  • Profit margins (1.8%) are lower than last year (3.3%)

View all Risks and Rewards

Operates as a health benefits company in the United States.

Why ELV?

Exploring new battery frontiers with developments in Solid State Batteries (SSBs).

Elevance Health Inc. (formerly Anthem, Inc.) is one of the leading health insurers in the US. The company operates through 4 segments: Commercial and Specialty business, Government business, CarelonRx(pharmacy benefit manager), and Other, with most revenue coming from pharmacy benefits and government contracts.

Elevance is the largest single provider of Blue Cross Blue Shield – a public welfare organization comprised of health insurers that reach over 100 million domestic customers.

Recently, the company showed significant growth for its size, boosting its revenues by 11% Y/Y. The growth is likely to continue – pushed by the increase in total addressable markets, but also in timely acquisitions. The latest one includes BioPlus – the largest independent specialty pharmacy provider. Still, Elevance boasts a strong balance sheet with a hefty cash position that can easily support further acquisitions if opportunities arise.

The thesis behind Elevance Health is simple. As a managed health insurance provider, the more members paying premiums, the more value that can be generated for shareholders. Concerns over rising healthcare costs, the growing prevalence of lifestyle related ailments and an aging population should be contributors towards a shift in US-based consumers seeking affordable healthcare coverage, a factor that is key to Elevance growing member numbers.

Although the company doesn’t pay a high dividend, it is worth mentioning that the healthcare sector yields an average of around 1.5%. Although there is a history of sustainable growth and plenty of room to increase the dividend, the company prefers buying back its shares – reducing the number of shares outstanding by 8% in the last 5 years.

Rewards

  • Trading at 59.6% below our estimate of its fair value

  • Earnings are forecast to grow 12.16% per year

  • Earnings have grown 8.5% per year over the past 5 years

Risks

  • Significant insider selling over the past 3 months

View all Risks and Rewards

Simply Wall St analyst Stjepan Kalinic and Simply Wall St have no position in any of the companies mentioned.

Simply Wall Street Pty Ltd (ACN 600 056 611), is a Corporate Authorised Representative (Authorised Representative Number: 467183) of Sanlam Private Wealth Pty Ltd (AFSL No. 337927). Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situation or needs. You should not rely on any advice and/or information contained in this website and before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice. Please read our Financial Services Guide before deciding whether to obtain financial services from us.