4 High-Growth Healthcare Stocks: 1 to Buy, 3 to Skip
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The healthcare industry is growing rapidly and healthcare spending is growing at around 8% every year. At that pace, the National Health Expenditures (NHE) as a share of GDP would be nearly 20% by 2019. Although the increasing healthcare costs are not good for patients and taxpayers, those who invest in healthcare stocks will benefit. The number of insured people is projected to increase by 32 million as Obama’s health reform kicks in, and the aging population will keep fueling the secular growth in health spending as well.
In this article, we'll discuss two fast-growing large-cap healthcare stocks.
Allergan Inc (NYSE: AGN): Although the poor economy has hurt some of Allergan’s product lines, the company is still growing rapidly. It has a leading market position in ophthalmic drugs and it is expanding abroad. With a strong focus on research and development, Allergan is also consistently developing new products. On the other hand, the company is faced with the strong competition in the aesthetics market. It might also be influenced by the fluctuations in the economy.
One of the main competitors of AGN in the drug manufacturers industry is Johnson & Johnson (NYSE: JNJ). JNJ has a forward P/E ratio of 11.89 versus 18.29 for AGN; JNJ is expected to grow at 6.23% on the average for the next five years, compared with 13.14% for AGN. As a result, AGN’s P/E ratio for 2014 is 14.3 while JNJ’s is 10.5. We like that Allergan has a high growth rate but we think it is overpriced. Johnson & Johnson is a better investment. Billionaire Ken Fisher was bullish about both stocks. His Fisher Asset Management had $668 million invested in JNJ and another $374 million invested in AGN at the end of 2011.
Covidien Plc (NYSE: COV): Covidien is another healthcare stock with double-digit expected growth rates. The company is continuously optimizing its portfolio through acquisitions and the divestiture of poor-performing units. It is also operating globally and growing in emerging markets. As a result, COV is expected to have double-digit EPS growth in the long term. Analysts estimate its EPS to grow at 10.5% on average per year over the next five years. Although the company is faced with high competition and pricing pressure in the medical instruments and supplies industry, it still has competitive advantages as a global leader in many products and supplies markets. COV has a forward P/E ratio of 11.37. With an expected EPS growth rate of 10.5%, COV has a 2014 P/E ratio of 9.3. COV’s main competitor, Becton Dickinson and Co. (NYSE: BDX), has a 2014 P/E ratio of 10.4. COV is also more popular among hedge funds. At the end of the third quarter, there were 34 hedge funds with COV positions, versus 20 for BDX. John Paulson is bullish about COV; Paulson & Co reported to own $88 million worth of COV shares at the end of September. Steven Cohen’s SAC Capital had more than $50 million in the stock as well. We recommend COV as a long-term play.
There are a few other healthcare stocks with double-digit expected EPS growth rates, like Intuitive Surgical Inc (ISRG) and Biogen Idec Inc (BIIB). However, these two stocks are relatively overpriced compared with their peers. ISRG has a forward P/E ratio of 30.29 and its EPS is expected to grow at 20.49% on the average per year in the next five years. So its P/E ratio for 2014 is around 21. ISRG’s main competitor, Medtronic Inc (MDT), has a forward P/E ratio of 12.47 and is expected to grow at 7.39%. Therefore, MDT’s P/E ratio for 2014 is only 11. Similarly, BIIB has a forward P/E ratio of 17.1 and is estimated to grow at 10.57%, while its competitor in the biotechnology industry, Amgen Inc (NASDAQ: AMGN), has a forward P/E ratio of 10.13 and is expected to grow at 8.85%. Hence, BIIB’s P/E ratio for 2014 is 14, versus 8.6 for AMGN. We prefer Amgen over ISRG and BIIB.
Overall most large-cap healthcare stocks have single-digit expected growth rates. We consider those stocks as long-term dividend plays. Our favorite pick among the stocks we discussed is Covidien. We are looking for 10+% EPS growth and a 2014 PE less than 10. Covidien satisfies our criteria by the end of 2013.
Motley Fool newsletter services recommend Becton, Dickinson and Co., Covidien Ltd. and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Fool blogger Meena Krishnamsetty does not own shares in any of the companies mentioned in this entry. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
