Lucrative Healthcare Stocks for Your Portfolio
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The healthcare industry faces major political headwinds, but demographics are a far more powerful force in the long-term. Political regimes only last for a few years in the United States, but demographics have trajectories that play out as expected over decades. For healthcare, an aging population is a strong overarching force that will drive revenue for years to come.
As people live longer, they will require more care, more surgery, more drugs, and more treatments. With the right investments, you can set your portfolio up to benefit from the big picture despite short or mid-term political risks. Healthcare stocks come in all varieties, from safe to high growth, and a varied strategy can pay off big over time.
Safe, traditional, and huge
McKesson (NYSE: MCK) is a massive $120 billion market cap company, which announced that over the next 10 years, business for the entire industry could double. That is not just for McKesson but also its competitors. McKesson has enough of a presence to grab the lion’s share of the growth if it can make the right decisions. That does not even mean taking risky decisions.
I think McKesson’s biggest draw is that it is almost buy-and-forget. You can take your position and just check in occasionally. The current price matters very little if you have a long-term outlook, and you can just take a position when ready. That may seem oversimplified, but McKesson has the benefit of being a well run company, with solid revenue growth, consistent free cash flow, and is in an industry with positive long-term forces behind it.
Healthcare companies hit snags every now and then from politics or other issues, but healthcare, as a whole, is growing and will persist for as long as humans are biological.
McKesson grows revenue pretty fast considering how large it is. With 11% revenue growth expected in 2014, I do not see any reason to defer taking a position in McKesson if you are building a long-term retirement portfolio. Even if 11% is a bit on the higher end, I would be fine if the number came in at over half that.
Don’t fight the future
Robots are the future, despite the recent problems faced by Intuitive Surgical (NASDAQ: ISRG). Once the robots take over, you can fight the future and take down SkyNet all you want, but for now, robots will become more important in all corners and healthcare is not immune from this.
I fully expect robots to be used in more and more surgeries as the technology and techniques are improved. That does not mean automated surgery, though lets not rule that out permanently, but robot-assisted surgery or remote surgery.
Intuitive Surgical is being looked at by the FDA, though I think it will be fine in the long run. A recent letter led to the company reducing its sales forecast. Nothing suggests that procedures need to stop. Some of the FDA’s complaints seem to focus on simple documentation and training of surgeons, which is a big but easily fixable issue. The issues regarding poor reporting of incidents is more worrisome, but I still think the issues will be sorted in a few months if not sooner.
Intuitive makes money for each procedure performed, and not just sales of the machines, parts, and support contracts. I expect Intuitive to be plagued by these problems for the next year, but it is a leader in robotic surgery. I think robotic surgery will grow over the next few decades.
Intuitive Surgical is at the forefront of this, but faces some headwinds right now. The recent decline in the share price following the FDA report is a good time to take your initial position. Writing some puts lower might be worth it since the FDA might have more complaints later. The probe is not over.
There are other kinds of robots out there, and not all of them are involved in medical procedures with a risk of death. For example, iRobot (NASDAQ: IRBT) is coming out with a medical telepresence device. This is basically a screen mounted to a base that will probably have some medical devices. The base can move around like the Roomba and navigate to a patient’s room. From a remote area, a doctor can meet the patient. The benefit is the reduced doctor fatigue, and allows patients to meet a doctor faster.
I do not see telepresence machines as a replacement for humans, but a tool to keep things efficient. You can have less doctors on staff with these machines, but meeting in person will still be important. Doctors will continue making rounds, but if the patient has a problem, then they can consult a doctor quickly.
The telemedicine machine is only one small part of the company. It is involved in telesecurity robots as well, which I think is a less worrisome use for some people. The company is trying to bring these robots to a lot of industries, while making them cheaper. Cheaper will make them ubiquitous. Most of the other applications like defense and security, or submersible robots, are in the very early stages. The most important segment is the consumer segment, which remains fairly robust. There do not seem to be too many other competitors out there either. If not the Roomba, then what?
The entry into security and medicine will overtake the consumer segment in my opinion. I imagine the margins will be larger along with a larger market for replacement parts and support contracts. Those segments will help iRobot grow up instead of being a consumer electronics novelty.
All three companies here have great potential. Intuitive offers some risk due to the issues surrounding it, but I think its long-term trajectory is up. With its diversity and new ventures, iRobot can make some real headway for revenue growth and profits. It is possible for iRobot to become a large cap stock in the future, and you might want to be there when it is.
I think telemedicine and other applications will offer a lot of high margin business for the company, because it seems so far ahead of the competitions. McKesson is the buy-and-forget stock, and I do not think there are any real issues regarding the company. Gains will not be huge, but they will be regular and sustainable.
The best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.
Nihar Patel has no position in any stocks mentioned. The Motley Fool recommends Intuitive Surgical, iRobot , and McKesson. The Motley Fool owns shares of Intuitive Surgical. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!