10 healthcare stocks to watch
Covid-19 has had a dramatic effect on the healthcare industry. Now, with the end of the pandemic potentially in sight, things look poised to change again. Discover the top 10 healthcare stocks to watch and how you can trade them.
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Healthcare stocks: what you need to know
Healthcare stocks are the companies involved in providing medical services. The healthcare sector makes up one of the largest portions of the global economy, with a range of different categories of businesses, including:
- Pharmaceutical companies: these are the companies involved in producing over-the-counter and prescription drugs. Often called ‘big pharma’, these companies spend large portions of their income on research and development
- Healthcare services: these companies include the hospitals and clinics, which are the backbone of any healthcare system. Although many countries choose to run a public healthcare system, private healthcare companies are available for investment. Insurance companies are also included in this sector
- Medical device stocks: these are the companies involved in the creation and distribution of everything from artificial joints to blood pressure monitors. The products of these companies are usually always in demand
- Biotechnology: the companies in this section of healthcare are involved in research and development of medicines and technologies derived from living organisms. They are involved in providing treatment for chronic and terminal ailments
What moves the prices of healthcare stocks?
The prices of healthcare stocks, like most assets, are moved by the forces of supply and demand. There are a broad range of factors that cause share prices to change, including news and economic data.
Most recently, the Covid-19 crisis has been the largest driving force behind healthcare stock prices. Some companies have benefitted from the increased demand for healthcare products and services, but others have suffered from declining patient treatment amid lockdown measures.
Broadly speaking, the other factors that affect healthcare stocks are:
- Demographics: as people live longer, and the population grows, there is an increased reliance on medical services. The increased demand for drugs and other products can have a positive impact on share prices
- Fiscal policy: the relationship between government spending and private companies is an important factor when assessing healthcare stocks. Policies that impact the taxation of companies, and the amount companies can charge for their drugs, can greatly impact profit margins
- Research and development: for manufacturers, the introduction of new products has the largest impact on their share price. Prior to a drug being released, the outcome of clinical trials and any related news will affect the company’s share price. The most dramatic example of this recently has been the development of the Covid-19 vaccines
- Regulation: any regulation that could restrict the output of manufacturing companies or cause issues in the service delivery could play out negatively across the company share prices
How to trade or invest in healthcare stocks
There are two ways that you can get exposure to healthcare stocks: investing and trading.
When you invest in healthcare stocks, you’ll be buying shares in a company outright. This is done in the hope that they increase in price, and you can sell them at a later date for a profit. Along with the physical shares in the company, you would receive shareholder rights and any dividends that are paid.
If you decide to trade healthcare stocks instead, you could speculate on shares and exchange traded funds (ETFs), whether they are increasing or decreasing in value. This means that you can focus on shorter-term market movements that might occur when news and regulatory announcements hit the market. You can trade on healthcare stocks via derivative products, such as CFDs.
CFDs are leveraged, so you’d need to put down a small initial deposit to gain full market exposure. While leverage can potentially make your money go a lot further, it can also magnify your losses, so a good risk management strategy is important.
Top 10 healthcare stocks to watch
- Johnson & Johnson (JNJ): $444.48 billion
- UnitedHealth Group Inc (UNH): $389.43 billion
- Pfizer Inc (PFE): $230.09 billion
- Eli Lilly and Company (LLY): $224.80 billion
- Abbott Laboratories (ABT): $210.96 billion
- Novartis (NOVN): $205.27 billion
- AbbVie Inc (ABBV): $204.44 billion
- Novo Nordisk (NVO): $200.53 billion
- Merck & Co Inc (MRK): $192.79 billion
- AstraZeneca (AZN): $152.87 billion
The healthcare sector is huge, with a large number of stocks to choose from, and plenty of opportunities for going long and short. Take a look at the top ten healthcare stocks by market capitalisation. All data for market capitalisations was collected on 20 July 2021 and should be used as estimates only.
Johnson & Johnson (JNJ) – market cap approximately $444.48 billion
Johnson & Johnson (JNJ) is the world’s largest healthcare company. It’s a multinational pharmaceutical and medical devices manufacturer based in the US, which consists of 250 companies – collectively called the ‘Johnson & Johnson family of companies’.
It is also one of a handful of companies producing Covid-19 vaccines around the world – a lucrative and big role, though there have been some questions around complications and its efficacy against some variants.
Quarter one (Q1) 2020 results showed the lingering effects of a net decline in international over-the-counter products and medical device sales, which has negatively impacted JNJ throughout 2020. However, in their quarter two (Q2) 2021 results, the company boasted a strong rebound, with sales climbing from 5.5% in Q1 to 27.1% in Q2 and operational growth figures of 23%. This is significant, considering that JNJ’s operational growth for the whole of financial year 2020 (FY20) increased just 1.5%. Earnings per share (EPS) was also increased 72.8% to $2.35 in Q2, compared to a 6.9% increase in Q1.
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UnitedHealth Group Inc (UNH) – market cap approximately $389.43 billion
UnitedHealth Group (UNH) is a health and wellbeing company that provides products and insurance services to more than 50 million patients in the US, and over 5 million worldwide.
The company has not had to recover from as many Covid-19 disruptions like some of the other healthcare stocks, as it was able to continue a large part of its operations in 2020 by switching in person client care to virtual consultations. In fact, UnitedHealth Group shares reached an all-time high of $356 on 16 November last year.
In its Q2 2021 results, UnitedHealth reported $71.3 billion in revenue, up 15% from FY20. EPS were also up from $17.65 to $18.80 in the latest results. However, this included $1.80 per share in ‘potential net unfavourable Covid-19 effects’.1 As a result, the company’s share price slipped briefly following the results release, making it an undervalued stock with great potential in some investors’ views.
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Pfizer Inc (PFE) – market cap approximately $230.09 billion
Pfizer Inc (PFE) is a US-based biopharmaceutical company that discovers, develops and delivers medicines, vaccinations and other healthcare products.
Pfizer is one of the largest Covid-19 vaccine producers and was the first company to announce its coronavirus vaccine was 90% successful on 9 November 2020. Its stock climbed 11%, while markets around the world rocketed – the FTSE 100 jumped by 5%, while the Dow Jones jumped 5.6% on opening. Then, its share price jumped 2% again on 16 November 2020 when it was announced Warren Buffett had invested $136 million in the company.
Since then, Pfizer has been on a winning streak, reporting revenues of $19 billion in Q2 2021 and $14.58 million in Q1 2021 – up 45% from Q1 2020. The company has also delivered on the dividend front. In Q1 2021, Pfizer paid $2.2 billion of cash dividends, or $0.39 EPS. The next dividend will be a further $0.39 in September 2021.
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Eli Lilly and Company (LLY) market cap approximately $224.80 billion
Eli Lilly and Company (LLY) is a US pharmaceutical company, with operations in more than 18 countries and sales in over 125 countries. The company has grown revenue strongly in the last couple of years, largely due to the Covid-19 pandemic, which has seen increased demand for the company’s treatments. Whether this positive momentum will continue after Covid-19 remains to be seen.
Eli Lily’s Q1 2021 results showed a 16% increase in revenue, though operating expenses also grew to the tun of 11%. Partly because of this, Q1’s EPS decreased to $1.49 on a reported basis and increased to $1.87 on a non-GAAP basis. The company has said it expects big things for 2021 and 2022, with its experimental Alzheimer’s drug, donanemab, recently receiving food and drug administration (FDA) approval and its recent acquisition of biotech business Protomer Technologies.
Management said they remained confident in the strength of Eli Lilly’s underlying business and believed it would continue to deliver success over the long term. In November 2020, Eli Lilly’s antibody treatment for Covid-19 was given emergency approval by the US FDA, which boosted the stock by 0.67% in four days.
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Abbott Laboratories (ABT) market cap approximately $210.96 billion
Abbott Laboratories (ABT) is an American healthcare company, which is focused on research-based drugs, medical devices and pharmaceuticals. It is considered a world leader in all of its core businesses, but is most famous for developing the first HIV blood screening test in 1985. Abbott Labs later spun off its pharmaceutical arm AbbVie, which is also one of the largest global healthcare stocks. The company has paid its shareholders dividends every year since 1924 and has increased these pay-outs for 48 consecutive years, making it a member of the elite group of stocks known as S&P 500 Dividend Aristocrats.
Abbott Laboratories remained stable despite Covid-19. By November 2020, ABT stock had gained over 37% over the last 12 months. Over the same period, the S&P 500 had risen by 12.31%. Abbott’s latest results from Q2 2021 were also strong, showing sales grew by 39.5% (largely bolstered by Covid-19 testing sales) and this was shown to be 11% higher than the company’s pre-Covid-19 pandemic sales. EPS were also up 105%, compared to Q2 2020, at $1.17.
The future outlook for Abbott Labs is predicted to be strong, with an expected profit growth of 76% over the next couple of years, which could feed into a higher share valuation. However, it’s likely this outlook has already been factored into its share price, which a lot of analysts now believe is overpriced.
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Novartis AG (NOVN) market cap approximately $205.27 billion
Novartis AG (NOVN) was founded in Switzerland in 1996, as a healthcare company focused on drug development. Novartis was listed on the SIX Swiss Exchange in 1996 at $23.26.
Covid-19 created a significant number of challenges that impacted Novartis in 2020. However, the company’s CEO Vas Narasimhan said that they’re confident the healthcare industry has learned from mistakes made in the first wave, including the postponement of treatment, which hurt sales of Novartis drugs in the same year. Despite these challenges, Novartis reported an increase of 13% increase in core operating income in their Q2 2021 results, brought on largely by an 11% increase in sales. All in all, net income grew by almost 50% in the quarter. EPS was also up significantly, from $0.82 in Q2 2020 to $1.29 in Q2 2021.
Novartis also recently announced that it is aiming to corner the market on a promising new cancer treatment – ‘novel radioligland therapy’ – which it estimates could be a $10 billion market in coming years.2 Management has also allegedly been looking to streamline the company, trimming down and selling off areas of its business. Both could vastly improve Novartis’ growth prospects and profits in future.
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AbbVie Inc (ABBV) market cap approximately $204.44 billion
AbbVie Inc (ABBV) was created after Abbott Laboratories split into two publicly traded companies. It launched with a handful of Abbott Labs’ best-selling drugs and quickly gained market share. It now has a market capitalisation of more than $200 billion.
In early September 2020, US Rep. Carolyn Maloney announced plans to subpoena AbbVie in an investigation into drug prices – causing ABBV stock to fall 3.7% intra-day and reach a nearly seven-month low of $79.11. AbbVie had been accused of obstructing the committee for 18 months, a charge the company refuted. AbbVie was particularly scrutinised by President of the US, Joe Biden who stated ‘The pharmaceutical giant AbbVie received a $1.3 billion tax handout, announced $10 billion worth of buybacks, then increased prices for more than ten of its products.’
As a Democratic president and Republican Senate majority became increasingly likely, the biopharma industry was boosted on hopes of fewer drug pricing reforms. AbbVie stock increased by 14.4% in the week following the election from 87.97 to 98.86. This was boosted further by its being added to Warren Buffett’s holdings in November 2020.
Since then, AbbVie has delivered strong performance, according to its CEO in their Q1 2021 results.3 Net revenues increased 51% while EPS guidance for the 2021 year was revised from a high of $6.89 up to $7.47. The company is also expecting approvals for five different products in 2021, leading to a dozen new rollouts in the next two years, about which the company has not given away much.
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Novo Nordisk (NVO) market cap approximately $200.53 billion
Novo Nordisk (NVO) is a Danish multinational pharmaceutical company that manufactures products, including diabetes care medication and hormone replacement therapies. It is one of the world’s largest suppliers of insulin.
Novo Nordisk’s earnings per share (EPS) grew 4.6% per year between 2017 and 2020, which has pushed its share price steadily higher – with an average annual share price increase of 10%.
Novo still generates around 85% of its revenue from diabetes care, but over recent years, the focus has shifted from insulin to a new diabetes drugs called GLP-1. The rise in its semiglutide drug platform, Ozempic, –pushed revenue higher in 2020, despite Covid-19.
Net profits for 2021 have been up over 6% as compared to 2020 already, with Q1 2021 results showing an increased financial outlook for 2021 of 6% to 10%, with operating profit expected to grow 5% to 9% in 2021.
Novo made huge progress on its aspirations in both diabetes and obesity medications, which saw sales grow by 8% over the first half of 2020 for obesity care, and an overall sales increase of 30%. In fact, Novo is expected to commence phase-three testing of its new obesity drug this year, that aims to aid in weight loss. There has been a lot of hype about the injection results in the first two stages of the trail, after it won FDA approval for use in lowering the risk of cardiovascular events in patients with Type 2 diabetes. This could prove a driving force behind Novo’s future share price movements.
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Merck & Co Inc (MRK) - market cap approximately $192.79 billion
Merck & Co Inc (MRK) is a US-based pharmaceutical company, established in 1891 as a subsidiary of the Germany company Merck.
Merck is another company that has been involved in the development of coronavirus vaccines. In March 2021, the company announced it would support manufacturing and supply of the Johnson & Johnson’s Covid-19 vaccine. In its Q1 2021 results, Merck’s EPS slipped marginally from $1.26 to $1.25. It also reported a sales decline of 1% but, at the same time, reported that it foresees an 8% to 12% increase in sales in 2021.
This is mostly due to Merck having had a bullish year so far. It is relaunching successful women’s health brand Organon, netting a distribution of nearly $9 billion in the process, plus has acquired Pandion Therapeutics and entered into HIV collaboration with Gilead Sciences. All of these moves could net Merck significant profits going forward.
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AstraZeneca (AZN) – market cap approximately $152.87 billion
AstraZeneca is an LSE-listed pharmaceutical company, specialising the oncology and respiratory-related treatments. More recently, it is famous for being the biggest producer of Covid-19 vaccines in the world.
After its formulation of the Oxford/AstraZeneca Covid-19 vaccine in early 2020, stocks predictably rose, although the company’s earnings from oncology-related treatments declined in 2020.
AstraZeneca’s Q1 2021 results showed positive results, leading a 3.3% jump in the stock price on the day of the announcement – although not for the reasons expected. Instead of the Covid vaccine, it was the company’s cancer drugs that led revenue growth for the quarter – a 15% rise in sales compared to Q1 2020. Core earnings also rose 55% to $1.63. This shows a reversal in AstraZeneca’s 2020 fortunes as more oncology treatments and facilities begin to be used worldwide.
Encouragingly, 53% of Q1’s revenue increases came from new medicines, compared to 47% in the same period last year, and the company has said it forecasts strong growth in its oncology drugs for the rest of 2021, giving some investors confidence that the company will continue to outperform once the ‘Covid effect’ has worn off post-Covid-19 pandemic.
What to bear in mind before trading healthcare stocks
The healthcare industry is currently experiencing a lot of volatility. The impacts of Covid-19 have both increased demand for research and development around treatments, as well as lowered the demand for other services.
Healthcare stocks have been a mixed bag in 2021, with some riding high on the ‘Covid effect’ while other healthcare stocks in general have declined. This could, however, experience a rapid turnaround post-pandemic.
Before you take a position on a healthcare stock, it’s important to do your research and look at how they’ve performed throughout 2020 and 2021 so far. Some of the stocks on our list have outperformed the market, while others have suffered due to the pandemic and general bear market.
Depending on your goals – whether you’re interested in long- or short-term market movements – you’ll need to look at lasting sustainability of the company’s share price. If it’s overvalued, you might consider taking a short position on it, in anticipation of a stock market correction. And if it’s undervalued, you might want to go long to benefit from long-term growth.
Healthcare stocks summed up
- Healthcare stocks are all the companies that are involved in providing medical services
- The healthcare sector makes up one of the largest portions of the global economy
- Healthcare stocks fall into four categories: pharmaceutical, healthcare services, medical devices and biotechnology
- There are range of factors that cause healthcare share prices to change, including demographics, fiscal policy, research and development, and regulation
- Covid-19 has been providing fuel for growth for some healthcare companies, while stagnating the growth of others
- Investing in healthcare stocks enables you to look at longer-term market movements
- Trading healthcare stocks enables you to look at interesting short-term volatility that could play out across the share prices of the companies
- It is important to keep an eye on the latest industry trends and the forecast for healthcare stocks
The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.
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