The best healthcare stocks should be on the radar of any investor who is looking to hedge their holdings in today’s volatile markets.
Persistent inflation and continued central bank tightening are testing the resilience of many investors, and healthcare stocks are good for both short- and long-term considerations. In the short run, they are considered a defensive hedge against inflation and a slowing economy since the demand for medical care remains constant no matter the macroeconomic environment. In the long term, a growing world population, especially among the aged, will raise demand for healthcare services.
Currently, healthcare is an “inexpensive, defensive sector” whose secular growth is the second fastest since 1986, according to a recent report from BofA Global Research. The sector has “strong fundamentals” and corporate ESG focus could drive additional healthcare spending, the report said.
But investors must be “choosy bulls in 2023,” according to BofA. Jared Woodard, head of BofA’s research investment committee and author of the report, suggests focusing on quality stocks in this environment.
How does one define a quality stock? A key metric for BofA is free cash flow yield − or a company’s free cash flow divided by its enterprise value. “Free cash flow yield might be the best measure of the quality of a company,” Woodard wrote in his research note.
The higher the ratio, the more ably a company can meet its debt payments, dividend payouts and other obligations. Look for yields of at least 4%.
BofA said its stock quality screener that uses this metric has beaten the S&P 500 by 7% per year on average, as well as other similar indexes.
With this in mind, here are the nine best healthcare stocks to buy now. Each name featured here has a free cash flow yield that is higher than 4%, attractive dividend yields and/or improving fundamentals.
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UnitedHealth Group Market value: $444.7 billionDividend yield: 1.4%Free cash flow: $23.4 billionEnterprise value: $489.2 billionFree cash flow yield: 4.9% As one of the nation’s largest health insurers, UnitedHealth Group (UNH (opens in new tab), $475.94) is a household name for many patients. It operates with a diversified business model that is divided into two parts: UnitedHealthcare and Optum.
UnitedHealthcare offers health insurance to individuals, employers, the government, and Medicare and Medicaid patients. Its global operations provide health and dental benefits, as well as hospital and clinical services in South America.
Optum offers pharmacy services and technology solutions to clients including payers, care providers, employers, government and consumers. Its tools help optimize care quality and delivery while reducing costs by leveraging data and analytics.
The company has experienced strong growth over the years: Revenue of $242.2 billion in 2019 has risen to $324.2 billion in 2022, according to its most recent earnings report. Earnings went up as well, from $13.84 billion ($14.33 per share) in 2019 to $20.6 billion ($21.18 per share) in 2022. Cash flow from operations came to $26.2 billion in the most recent fiscal year.
Moreover, UNH affirmed its outlook for 2023: Revenues of $357 billion to $360 billion and net earnings of $23.15 to $23.65 per share. Cash flow from operations is projected to come in at $27 billion to $28 billion.
Its strong execution is enabling UnitedHealth to forecast revenue and profit increases of up to 10% to 12% − as well as cash flow growth of up to 7% − in a year marked by widespread layoffs amid an economic slowdown. This is why UNH is one of the best healthcare stocks to watch this year
UNH is also one of the highest-rated Dow stocks too. The consensus recommendation is a Strong Buy, based on the average ratings of 23 analysts in the last three months, according to Nasdaq.
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Merck Market value: $269.6 billionDividend yield: 2.7%Free cash flow: $14.7 billionEnterprise value: $295.2 billionFree cash flow yield: 5.0%Merck (MRK (opens in new tab), $106.24) is one of the largest pharmaceutical companies in the world. It develops and markets prescription medicines, vaccines and biologic therapies, as well as animal health and consumer care products.
MRK has a diversified portfolio of high-margin drugs across multiple therapeutic areas, with its blockbuster Keytruda drug accounting for more than a third of total revenues, according to its latest SEC filing (opens in new tab). Keytruda sales rose 22% in 2022 from the prior year.
The drugmaker boasts solid financial performance, with steadily increasing revenue and profitability. Revenue has risen from $46.8 billion in 2019 to $59 billion in 2022. Net income has similarly risen, from $9.8 billion ($3.81 per share) in 2019 to $14.5 billion ($5.71 per share) in 2022. Free cash flow came to $14.7 billion in the trailing 12 months, 59% higher than 2021 and up 163% from 2020.
The stock has performed solidly against the industry, with a five-year total return of 17.3% versus 13.1% for the industry and 9.4% for the Morningstar U.S. Market TR USD Index, a diversified broad-market index.
However, some risks include Keytruda going off patent in 2028 and the Biden administration’s Inflation Reduction Act of 2022 – which seeks to lower drug prices – that kicks in this year.
But one of Wall Street’s best healthcare stocks is ramping up its research and development efforts to find new drugs and offset those lost to patent expiration. These include a Keytruda-related lung cancer drug, a melanoma drug co-developed with Moderna (MRNA (opens in new tab)), and other pharmaceuticals.
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Amgen Market value: $123.7 billionDividend yield: 3.6%Free cash flow: $8.8 billionEnterprise value: $154.8 billionFree cash flow yield: 5.2%Amgen (AMGN (opens in new tab), $231.66) is a biotechnology company that develops and markets prescription drugs for patients suffering from serious illnesses. It made its name with drugs for anemia and neutropenia − Epogen and Neupogen, respectively − three decades ago and continues to bring innovative drugs to its pipeline.
While the company has been seeing topline pressure of late, with revenue for fiscal 2022 rising just 1% to $26.3 billion from the prior year, profitability remains solid with net income up 11% to $6.55 billion ($12.11 per share) year-over-year. Operating income fared even better, increasing 25% to $9.57 billion, according to AMGN’s most recent earnings report.
In 2022, Enbrel – used to treat rheumatoid arthritis, psoriatic arthritis, plaque psoriasis and other inflammatory conditions − accounted for 16% of total global drug sales, followed by osteoporosis drug Prolia with 10%. If just looking at the U.S., Enbrel would have comprised 23% of total domestic drug sales, while Prolia would take up 14%.
Another reason AMGN is on this list of best healthcare stocks is its promising pipeline of drugs, including Repatha for cardiovascular disease, Lumakras for colorectal cancer and asthma drug Tezspire.
Moreover, its pending acquisition (opens in new tab) of Horizon Therapeutics (HZNP (opens in new tab)) for $28 billion in cash – after winning a bidding war against blue chip stocks Johnson & Johnson (JNJ (opens in new tab)) and Sanofi (SNY (opens in new tab)) – gives Amgen a drug pipeline that treats rare diseases, which the company said complements its own innovative therapeutics.
Horizon developed the drugs Tepezza for thyroid eye disease, Krystexxa for chronic gout and Uplizna for neuromyelitis optica spectrum disorder (NMOSD) that causes inflammation in the nerves of the eye and spinal cord. NMOSD occurs when a body’s immune system attacks its own cells. This happens mainly in optic nerves connecting the eye retina to the brain and spinal cord, according to the Mayo Clinic.
The acquisition is expected to be accretive to non-GAAP earnings starting in 2024.
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Humana Market value: $61.9Dividend yield: 0.7%Free cash flow: $3.5 billionEnterprise value: $55.8 billionFree cash flow yield: 6.3%Humana (HUM (opens in new tab), $495.02) is one of the largest health insurers in the U.S., with a special focus on serving the elderly, not surprising given its roots as a nursing home in the 1960s. It has a top-tier presence in Medicare Advantage plans, which is expected to grow as the baby boomer population ages.
“Given U.S. demographic trends and the increasing penetration of Medicare Advantage plans in the eligible population, Humana remains at the forefront of one of the fastest-growing areas in U.S. health insurance,” writes Morningstar analyst Julie Utterback in a recent research note.
Humana is second in Medicare Advantage plans, with an 18% market share as of 2022, behind only UnitedHealth, which has 28% share, Utterback said.
Moreover, HUM usually comes in first or second in Medicare Advantage plans in the counties where it operates, with market share closer to 30% and above in those core local markets, she added.
Further, Humana claims that once a customer stays with its Medicare Advantage plan for two years, that person is usually a customer for life. “Profitability tends to rise with time during that retention period, so maintaining those relationships is especially important to Humana,” Utterback said.
She expects Humana revenues to grow around 10% compounded annually through 2027, earnings per share to increase 13% compounded annually and free cash flow to rise to $6 billion in the same timeframe.
The top healthcare stock earned 4 out of 5 stars from the analyst, with a fair value of $550. HUM last closed at $495.02.
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Bristol Myers Squibb Market value: $144.7 billionDividend yield: 3.3%Free cash flow: $11.9 billionEnterprise value: $177.0 billionFree cash flow yield: 6.7%Bristol Myers Squibb (BMY (opens in new tab), $68.96) is one of the world’s largest pharmaceutical companies that develops and markets prescription drugs, biologics and vaccines for cancer, diabetes, cardiovascular disease and many others. The size of one of Wall Street’s best healthcare stocks today is the result of 19 acquisitions at a cumulative cost of more than $100 billion.
BMY’s most recent acquisition was Turning Point Therapeutics in 2022 for $4 billion, which expands its precision oncology portfolio. Precision oncology refers to personalized therapies to determine the most effective treatment.
Turning Point’s lead drug candidate, repotrectinib, treats non-small cell lung cancer and other advanced solid tumors. It has been shown (opens in new tab) to positively affect 79% of patients in recent trials. The Food and Drug Administration (FDA) has granted the drug three “Breakthrough Therapy Designations.”
BMY has also entered a number of partnerships to co-develop drugs, sharing the development costs as well as risks if clinical tests disappoint or the treatment fails to get regulatory approval.
Bristol-Myers claims that its partnerships (opens in new tab) have brought “significant commercial success and pipeline growth,” with 12 of its 20 blockbuster drugs coming from such collaborations. Moreover, more than 60% of its current pipeline of drugs is sourced externally to complement internal competencies.
Some headwinds for BMY include competition from generics. For example, drug sales in 2022 were hurt by lower sales of Januvia and Janumet for the treatment of Type 2 diabetes, due to competition from generic drugs in Europe.
Still, analysts’ consensus price target of $81.47 represents expected upside of more than 18% for BMY stock over the next 12 months or so.
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Jazz Pharmaceuticals Market value: $8.8 billionDividend yield: N/AFree cash flow: $984.0 millionEnterprise value: $13.7 billionFree cash flow yield: 7.2%Jazz Pharmaceuticals (JAZZ (opens in new tab), $140.40) specializes in developing and commercializing treatments for central nervous system disorders, such as narcolepsy and sleep apnea, as well as oncology-related conditions.
It has well-established drugs such as Xyrem, used to treat sudden muscle weakness and excessive daytime sleepiness in narcolepsy, and Erwinaze, which treats acute lymphoblastic leukemia, a common form of childhood cancer. However, a generic version of Xyrem hit the market in January.
Meanwhile, the company is working to diversify its revenue sources. Xyrem had comprised 76% of 2019 revenue of $2.2 billion, and that was down to about a third in 2022, with expected revenue of $3.6 billion to $3.7 billion. Management guided to $5 billion in revenue in 2025.
Jazz is particularly bullish on Xywav, the first and thus far only FDA-approved treatment for idiopathic hypersomnia (IH) in which victims are very sleepy during the day even with a good night’s sleep. Xywav not only treats IH, but also narcolepsy, offsetting Xyrem going off patent.
The company also believes that Epidiolex, its drug to treat pediatric onset epilepsy, has the potential to be a blockbuster. It is the first and thus far only FDA-approved prescription cannabidiol (from cannabis plants) for treatment of patients one year and older. The patent stays until 2035 to 2039 (oral form).
Analysts agree that JAZZ is one of the best healthcare stocks out there. The consensus recommendation is Strong Buy, based on a survey of 18 analysts in the last three months, according to Nasdaq.
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AbbVie Market value: $272.3 billionDividend yield: 3.8%Free cash flow: $24.3 billionEnterprise value: $327.0 billionFree cash flow yield: 7.4%AbbVie (ABBV (opens in new tab), $153.90) is a specialty biopharmaceutical company that specializes in developing treatments for chronic and complex conditions such as various types of cancer, autoimmune diseases and neurological disorders.
A spin-off from Abbott Laboratories (ABT (opens in new tab)), the company’s key therapeutic areas are immunology, oncology, neuroscience, eye care, virology and women’s health. Its most popular drug is Humira, used to treat rheumatoid arthritis and approved also for psoriasis and Crohn’s disease.
Humira accounted for 37% of total revenues in 2022, making AbbVie vulnerable to rising competition. However, the company has a strong pipeline of drugs in development such as Skyrizi for inflammation, Rinvoq for Crohn’s disease and Imbruvica for cancer.
AbbVie’s acquisition of Allergan in 2020 further diversifies its business. Allergan gives ABBV entry into the cosmetic treatments industry with such iconic brands as Botox for wrinkles, CoolSculpting for fat removal and Juvederm for body fillers to do such things as reshape sagging behinds.
In addition to being one of the best healthcare stocks, AbbVie is also one of the best dividend stocks to own. The company offers a consistent track record of increasing its dividend payments. Since 2017, the company’s trailing dividend yield has risen from 2.7% to almost 4% at present. Last October, ABBV increased its dividend by 5% to $1.48 per share.
The company also consistently increased its free cash flow, from $12.8 billion in 2019 to $24.3 billion in 2022.
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Moderna Market value: $53.6 billionDividend yield: N/AFree cash flow: $4.6 billionEnterprise value: $43.5 billionFree cash flow yield: 10.6%Moderna (MRNA (opens in new tab), $138.8) is a biotechnology company that burst into the public consciousness during the pandemic, known for its messenger RNA (mRNA) technology that enabled the rapid development of a COVID-19 vaccine.
In a year, Moderna was able to develop and receive regulatory approval for a two-dose COVID-19 vaccine – one of the first in the world. Its vaccine is authorized to be used by several regulatory agencies around the world.
The pandemic catapulted its financials: from revenue of $60 million in 2019 to $19.3 billion in 2022, and a loss of $514 million (-$1.55 per share) to net income of $8.4 billion ($20.12 per share) over the same timeframe.
For 2022, COVID-19 vaccine sales hit $18.4 billion. MRNA also said it has more than $18 billion in cash and cash equivalents on its balance sheet.
Beyond Covid, the mRNA technology has the potential to revolutionize the drug development process.
Moderna is one of the best healthcare stocks in this field and has a pipeline of potential treatments for a range of conditions. These include vaccines against respiratory syncytial virus (RSV), seasonal flu, and cytomegalovirus, which is the leading cause of birth defects in the U.S.
Moderna and Merck are also working together on a personalized cancer vaccine called mRNA-4157/V940, which is combined with Merck’s Keytruda drug, for stage 3 and 4 melanoma. Clinical trials showed the risk of disease recurrence or death was reduced by 44% compared with Keytruda alone.
Moderna also is working on a vaccine for propionic acidemia, which is the body’s inability to process certain parts of proteins and fats properly. Other drugs in the pipeline include one for heart failure and another for cystic fibrosis, the latter in collaboration with Vertex Pharmaceuticals (VRTX (opens in new tab)).
There is more to come as the company revealed that its R&D budget for 2023 will see a “significant” increase to around $4.5 billion.
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AMN Healthcare Services Market value: $3.7 billionDividend yield: N/AFree cash flow: $572.8 millionEnterprise value: $4.5 billionFree cash flow yield: 12.7%AMN Healthcare Services (AMN (opens in new tab), $90.01) is one of the world’s largest medical staffing providers, including temporary or permanent positions and traveling nurses. The company faces a positive outlook in the long term as a shortage of nurses and other healthcare professionals and staff continues amid an aging population that requires more medical care.
Morningstar analyst Debbie Wang said AMN’s ability to provide “almost any type of medical worker” appeals to its customers as they can use one vendor for all their medical hiring needs. “These managed services relationships have been a major focus for AMN Healthcare, and the firm has become one of the premier HR managed services providers as a result.”
With a managed services agreement, AMN takes over the entire staffing and employee performance review process for a provider. As such, it serves as a way to keep clients when temp placement agencies are easily replaced.
“This service creates higher customer switching costs, allows AMN to gain first shot at meeting a customer’s entire staffing needs, and gives the firm the opportunity to see real-time leading metrics in the healthcare industry,” Wang wrote in a research note.
The analyst pegged the stock’s fair value at $102. It is currently trading at $90.01.
The top healthcare stock has a history of rising revenues as well as profits, with the exception of pandemic-affected 2020. Revenue rose from $2.2 billion in 2019 to $5.2 billion in 2022, while net income of $114 million ($2.40 per share) rose to $444.1 million ($9.90 per share) in the same timeframe.
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