In my view, it’s important for every individual to invest in equities. By just holding cash in a back account, there is bound to be loss of purchasing power when adjusted for inflation. To maintain or increase purchasing power, investors need exposure to risky asset classes.
However, not all investors have the appetite for high-risk that’s associated with growth or penny stocks. The remedy is to invest in low-beta stocks that deliver steady returns and protect the portfolio from extreme volatility. The focus of this column is on seven healthcare stocks to buy for positive inflation-adjusted returns.
It’s worth noting that the healthcare sector, in general, has a low-beta. The reason is that healthcare is a necessity and is immune to economic downturn or inflationary pressure in the economy. The healthcare stocks discussed are attractively valued and total returns from these ideas is likely to beat inflation on a sustained basis.
Pfizer (PFE)
Pfizer (NYSE:PFE) stock has corrected sharply by 22% in the last 12 months. However, the stock has remained sideways year-to-date. This is a sign of bottoming-out and I expect a strong rally after some consolidation. My view is underscored by the point that PFE stock trades at an attractive forward P/E of 11.8x and offers a dividend yield of 6%.
Slow growth in a post-pandemic world and the impact on revenue from drugs going off-patent have been headwinds for Pfizer. However, it’s worth noting that Pfizer has a strong pipeline of new molecular entities. As late-stage candidates are commercialized in the next few years, growth is likely to be supported.
To put things into perspective, Pfizer has 37 phase-three candidates and 28 phase-two candidates in a total product pipeline of 113. I must add that the biopharma company has pursued acquisitions to broaden its portfolio. With the acquisition of Seagen, the company expects to achieve oncology leadership.
Merck (MRK)
Merck (NYSE:MRK) is another attractively valued blue-chip pharmaceutical stock. For year-to-date, MRK stock has trended higher by 16%. However, at a forward P/E of 14.7x, valuations are still attractive. Further, MRK stock offers a dividend yield of 2.45%.
The first positive is an attractive pipeline. Currently, Merck has 30 programs in phase three. Further, more than 80 programs are in the second phase. As new molecular entities are commercialized, Merck is positioned for steady top-line growth.
Merck expects that the oncology pipeline has a sales opportunity of $20 billion by mid-2035. This puts into perspective the potential growth trajectory. It’s worth noting that for Q1 2024, Merck reported revenue growth of 9% on a year-on-year basis with the oncology business remaining the growth driver.
The animal health segment growth was relatively subdued at 4%. However, Merck recently completed the acquisition of the aqua business of Elanco Animal Health (NYSE:ELAN). This will bolster the company’s position in the aqua industry and support growth acceleration.
AstraZeneca (AZN)
AstraZeneca (NASDAQ:AZN) is another attractive name among pharmaceutical stocks for sustained value creation. AZN stock has witnessed a healthy rally of 14% for year-to-date. I expect the positive momentum to sustain on the back of healthy growth visibility.
Like all the pharma majors, AstraZeneca has a deep pipeline of 182 projects. Of these 19 new molecular entities are in the late-stage pipeline and will contribute to growth in the next 12 to 24 months.
It’s worth noting that AstraZeneca ended 2023 with total revenue of $45.8 billion. Backed by the launch of 20 new molecular entities, the pharma company expects to deliver top-line of $80 billion by 2030. Further, by 2026, the pharma major is targeting mid-30s% core operating margin.
Therefore, growth will be associated with steady upside in cash flows. This will support aggressive investment in the research and development pipeline.
An important point to note is that AstraZeneca is well diversified from a geographic perspective. For Q1 2024, the company’s growth in emerging markets (excluding China) was 40% on a year-on-year basis. This is another factor that’s likely to support the overall growth momentum.
PACS Group (PACS)
PACS Group (NYSE:PACS) is a relatively new listing that’s still under-the-radar. The provider of skilled nursing and assisted living facilities in the U.S. holds immense growth potential. At a forward P/E of 20.6x, PACS stock is a steal.
Currently, the healthcare company operates 218 facilities spread across nine states in the U.S. In May, the company acquired 53 skilled-nursing facilities across eight western states. With organic and acquisition driven growth, there is ample scope for expansion in new states. This is one reason to believe that revenue growth will remain robust.
The second point to note is that the company’s mature facilities have an occupancy rate of 94.6%. As more facilities mature in the next few years, growth will be supported with cost being the differentiating factor.
To put things into perspective, the cost of acute care at a hospital is $2,914 per day. In the post-acute care segment, inpatient rehabilitation facility and long-term acute care hospital have a cost per day of $1,850 and $1,753 respectively. In comparison, the company’s skilled nursing facility has a cost per day of $550. This cost advantage is a big positive for PACS Group.
Intuitive Surgical (ISRG)
Intuitive Surgical (NASDAQ:ISRG) stock has witnessed a strong rally of 31% for year-to-date. I agree that valuations look stretched in the near-term. However, any correction of 10% to 15% from current levels would be a good opportunity to accumulate.
As an overview, Intuitive Surgical is a provider of robotic-assisted, minimally invasive surgery. The company’s technologies include the da Vinci Surgical System and the Ion Endoluminal System.
For Q1 2024, the robotic-assisted surgery equipment provider reported revenue growth of 11% on a year-on-year basis to $1.89 billion. For the same period, GAAP operating income was $469 million.
It’s worth noting that Intuitive ended Q1 with a robust cash buffer of $7.32 billion. This provides ample flexibility to pursue investment in R&D. In March, the company received U.S. Food and Drug Administration clearance for da Vinci 5, the company’s next-generation multiport robotic system. With technological advancement and global presence, Intuitive is positioned for sustained growth.
Tenet Healthcare (THC)
Tenet Healthcare (NYSE:THC) is another healthcare stock that has been rallying. However, even after an upside of 58% in the last 12 months, THC stock trades at an attractive forward P/E of 14.6x. Gradual exposure can therefore be considered.
As an overview, Tenet Healthcare is a diversified healthcare provider. Through United Surgical Partners International, the company provides the largest ambulatory platform in the U.S.
Further, the company also has a portfolio of acute care and specialty hospitals. Steamboat Capital Partners rightly points out that the company’s M&A transactions are building an empire. Steamboat further that the stock has a “significant upside.”
For Q1 2024, Tenet reported revenue and EBITDA of $5.4 billion and $1 billion respectively. Further, operating cash flow for the quarter was $586 million. With an annual OCF potential of $2.5 billion, there is ample flexibility for acquisition driven growth.
Abbott Laboratories (ABT)
Abbott Laboratories (NYSE:ABT) stock has remained sideways in the last 12 months. I see this as a good buying opportunity with ABT stock trading at a forward P/E of 22. Further, the stock also offers a healthy dividend yield of 2.16%.
For Q1 2024, Abbott reported healthy organic sales growth of 10.8% on a year-over-year basis to $10 billion. The medical devices segment growth was healthy at 14.3% coupled with the established pharmaceutical business growth of 13.7%. The company has also increased the full-year earnings per share guidance in the range of $4.55 to $4.70.
An important point to note is that the nutrition segment growth for Q1 2024 was 7.7%. I expect this business segment growth to accelerate in the coming years. Recently, the company launched the PROTALITY™ brand that provides nutritional support for adults pursuing weight loss. With more than 7 in 10 adults being overweight or obese in the United States, the addressable market is significant.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.