3 Healthcare Stocks You'll Want to Watch in the First Quarter

Charles Dickens could have been talking about healthcare stocks in 2016 when he wrote "it was the best of times, it was the worst of times." Some stocks, like UnitedHealth Group (UNH 0.23%) and Veeva Systems (VEEV -0.29%), soared. Others, such as Illumina (ILMN -1.28%), stumbled. However, I think all three of these are healthcare stocks you'll want to watch in the first quarter of 2017. Here's why.

Image source: Getty Images

Is a comeback in Illumina's DNA?

Illumina's dismal performance in 2016 stemmed from a couple of primary factors. Sales of the company's high-throughput genomic sequencing systems were lower than expected. Illumina also set expectations too highly based on faulty forecasting. 

The company announces its fourth-quarter and full-year 2016 results on January 31. Investors will want to look for any hints that Illumina has found a way to make up for HiSeq system sales that have been delayed due to how the U.S. government is funding capital projects. The issue itself wouldn't have been resolved in the fourth quarter, but it will be interesting to see if the company has been able to compensate somewhat for weakness in the U.S. high-throughput market by selling more internationally.

Expect significant progress from Illumina in correcting its forecasting problems. The company should have wrapped up its first phase of a project to improve its forecasting accuracy in December. A second phase of this effort, which will address longer-term tool and process implementations, was planned to begin in early 2017. 

Will UnitedHealth Group be more appealing if Obamacare is repealed? 

You might think that health insurance stocks could be in trouble with what seems to be an imminent repeal of Obamacare. So far, that doesn't seem to be the case -- especially with UnitedHealth Group. The nation's largest health insurer saw its share price rise 37% last year, with a 13% jump after the results of the U.S. election in November made Obamacare's demise more likely.

I think it will be interesting to watch UnitedHealth's stock in the first quarter as President Trump and the GOP-controlled Congress work to enact their healthcare proposals. UnitedHealth Group isn't as vulnerable as some insurers are to a repeal of Obamacare. The company pulled out of most of the state Obamacare exchanges. 

The biggest wrinkle for UnitedHealth Group could come from what replaces Obamacare. Some of the GOP ideas, such as allowing competition across state lines, could help big health insurers. Although passage of any major changes could be later this year, the first-quarter discussions of what might be in store could help UnitedHealth Group's stock extend its momentum from last year.

Will Veeva Systems' future become cloudy?

Veeva Systems is one of the hottest healthcare stocks around. Shares of the cloud-based solutions provider for the life sciences industry soared over 75% in the last 12 months. But will the first quarter show signs that Veeva could cool down?

The company is expected to announce its fourth-quarter and full-year 2016 results in late February or early March. Veeva provided guidance of fourth-quarter revenue between $145.0 and $146.0 million and adjusted net income per share of $0.17. Analysts have closely aligned their estimates with Veeva's projections.

However, Veeva blew away earnings estimates throughout 2016 with huge positive surprises. With a sky-high valuation, even a small blip could cause the stock to drop. My colleague Brian Stoffel recently pointed out that the biggest risk for Veeva could be its growing pains. It's possible that we might see evidence of those growing pains in the company's announcement later this quarter.

Most likely to succeed in 2017

Out of these three healthcare stocks to watch, I think UnitedHealth Group might have the best prospects for 2017. While the drama in Washington, D.C. will likely help the big insurer's stock, UnitedHealth should benefit the most from its growing Optum business segment.

Wall Street projects UnitedHealth Group will grow earnings by an average annual rate of nearly 16% over the next five years. That's a lot higher than the company's average earnings growth of 9.4% over the past five years -- a period in which UnitedHealth Group's stock nearly tripled. This is definitely a healthcare stock to watch.