The past year has been kind to investors, with the S&P 500 up about 25% for 2019 through mid-December. But the record-long bull market can’t keep running forever, and concerns over the pace of recent gains versus their economic justification ring increasingly true. Historically speaking, the health care sector tends to perform well late in the economic cycle and even hold firm in recessions, offering a welcome reprieve in challenging markets. On the other hand, the specter of Medicare for All may inhibit the growth of health care stocks as 2020 elections loom. Here are 10 of the best health care stocks to buy for 2020.
First of the best health care stocks to buy for 2019 is DaVita, a $9 billion Denver, Colorado-based company with a network of nearly 3,000 outpatient dialysis centers. Last quarter alone, DVA provided kidney dialysis services to 233,000 patients with chronic kidney failure or end stage renal disease. The company also beat both revenue and earnings per share (EPS) expectations, simultaneously raising 2020 EPS guidance. Trading for 13 times forward earnings, analysts expect DVA to grow EPS at a 23% annualized rate over the next five years, partially driven by a $2 billion stock buyback program. Warren Buffett also happens to be a fan of DVA, owning about 30% of the company via Berkshire Hathaway (BRK/B).
Also named one of the best blue-chip stocks to buy for 2020, $200 billion Swiss drugmaker Novartis is a global pharma powerhouse that most health care investors should know well. NVS may finish 2019 with 15 different drugs grossing at least $1 billion a year. Cosentyx (plaque psoriasis, psoriatic arthritis treatment) and Gilenya (multiple sclerosis) are each primed to gross over $3 billion in 2019, and the company has been revising guidance upwards. CEO Vas Narasimhan, who took over in 2018, is proving an aggressive leader – a necessary trait in the fast-moving, cutthroat pharma industry. A recent agreement to acquire The Medicines Co. (MDCO) for $9.7 billion gives Novartis a potential blockbuster cardiovascular drug that will likely be put before U.S. and European regulators in early 2020.
IDXX tripled over the last five years yet still has room to outperform over the next five. That’s because few companies have the steady growth profile of an Idexx Labs, the unassuming Maine diagnostics company that carved out its niche in the field of animal care. Not all of the best health care stocks to buy for 2020 have to be focused on health care for humans, after all, and the growing demand for pets in the U.S. has led to booming demand for veterinary instruments, tests and imaging equipment. Idexx also makes products for the livestock industry, and though shares aren’t cheap at 50 times earnings, analysts expect this growth stock to keep growing, forecasting annualized EPS growth of 18.5% for the next five years.
A list of the best health care stocks to buy for 2020 wouldn’t be complete without AbbVie, a $128 billion drugmaker that was also named one of the 10 best overall stocks to buy for 2020. While AbbVie doesn’t have the growth potential a company like Idexx enjoys, ABBV does make the best-selling drug in the world (Humira), and after its $63 billion deal for Allergan (AGN) it now owns Botox as well. Trading for less than 9 times forward earnings, AbbVie and its 5.5% dividend look like a good bet for income investors, who enter 2020 with few options as interest rates hover near historical lows.
Indianapolis, Indiana-based health insurer Anthem is also one of the best health care stocks to buy for 2020, making the list for a second consecutive year. In simple terms, ANTM stock just trades a little too cheaply compared to its peers, boasting a price-earnings growth (PEG) ratio below 1 (0.95). A lower ratio indicates investors are paying less for future growth, and the next-cheapest peer has a PEG ratio of 1.24. Fears of “Medicare for All” may be holding shares back, and such policies would be a threat to ANTM. But fear births opportunity, and with analysts expecting earnings to compound at an 18% clip for the next five years, Wall Street doesn’t think Anthem’s business is threatened in the least.
It’s remarkable more people don’t marvel at Japan’s Takeda Pharmaceutical, which has been around since 1781 – far longer than any other company on this list. But don’t jump to any conclusions: Takeda has no trouble keeping pace with modern markets, levering up for a megadeal to acquire Shire PLC for $62 billion in 2018. TAK might not be one of the best health care stocks to buy for 2020 if not for the market’s skeptical reaction to the merger; shares are still 33% below 2018 levels. Early results look promising though, as year-over-year revenue rose 88.5% in the last six-month period. TAK is selling non-core divisions to pay down debt and remains on track with its deleveraging plans. Takeda pays a 4.1% dividend and boasts a globally diversified portfolio of drugs for gastroenterology, rare diseases, immunology, oncology and neuroscience.
No, perhaps you won’t find yourself bragging at the bar about your enormous gains in CVS stock, but the $95 billion pharmacy and health plan provider (remember, it snapped up Aetna in late 2018) is a steady Eddie that conservative investors can rely upon. CVS’ goals aren’t humble: it aims to transform health care by making it more accessible, personalized and cheap than ever before. It began with three HealthHUBs, store sections featuring health classes, nutrition seminars, dietician access and other health-focused products and services. The encouraging response has CVS shooting for 1,500 HealthHUB locations by the end of 2021. Management expects earnings growth to slowly accelerate, reaching low double digits in 2022. CVS stock trades for 10 times forward earnings and pays a 2.7% dividend.
Interestingly, Cigna was once destined to merge with another company on this list, Anthem, but the Department of Justice and the courts ultimately blocked it on antitrust grounds, and Anthem subsequently dropped the acquisition. Currently, both health insurers are suing each other, but don’t let that prevent you from buying a solid $72 billion health care stock trading at just 10 times forward earnings. Cigna’s Collaborative Accountable Care (CAC) initiative is an innovation in the industry, financially incentivizing providers for good health care quality and outcomes. Analysts expect low-teens earnings growth going forward and insiders seem bullish too, with one director recently buying $2 million in stock in early December.
Each of the best health care stocks to buy for 2020 have so far been established, consistently profitable companies with reasonably predictable business trajectories. Intercept, as a $4 billion biotech, deviates from that model, offering a fairly large potential payoff along with higher risk. Analysts are excited by a recent Food & Drug Administration decision to review ICPT’s treatment for fibrosis due to nonalchoholic steatohepatitis. The FDA is shooting to approve or deny the drug – which analysts believe could become a $1 billion drug by 2024 – by late March. Until approval, ICPT is a one-drug company, with sales of Ocaliva, its chronic liver disease treatment, up 32% last quarter.
Johnson & Johnson
The last health care stock to buy for 2020 is a familiar name: Johnson & Johnson, the most valuable publicly traded company in the entire sector. In stark contrast to the one-drug ICPT, JNJ is one of the most well-diversified companies on earth, with three business divisions: pharmaceuticals, medical devices and consumer. The company has increased its dividend payout annually for 56 straight years, and JNJ currently yields 2.7%. A low-growth blue-chip portfolio anchor, JNJ is built to withstand recessions with ease, with steady mid-single-digit growth very difficult to stop. Patented drugs like Stelara (immunology) and Darzalex (oncology) are each multibillion-dollar growth drivers, growing by 26% and 50%, respectively, in the last nine-month period.