Picking the top health-care stocks for 2014 isn't easy. In addition to the normal valuation issues that every sector has, health-care stocks are at the whim of the Food and Drug Administration and predicting the binary outcomes of clinical trials isn't easy.
Of course if you can pick correctly, the top health-care stock in 2014 will far outpace other sectors. Those winners helped the Nasdaq Biotechnology index produce a 65% return this year, outperforming the broader Nasdaq index by more than 25 percentage points this year.
Here are three health-care stocks that could top the charts in 2014.
2014 Top health-care stock No. 1: Joining the pack
It's a heck of a lot easier to determine the potential value a biotech when there's a company further ahead with nearly identical assets. Orexigen (NASDAQ: OREX ) has two.
The biotech is developing an obesity drug Contrave, which will be reviewed by the FDA in 2014. Further ahead, Arena Pharmaceuticals (NASDAQ: ARNA ) developed obesity drug Belviq that launched this year. VIVUS (NASDAQ: VVUS ) sells Qsymia, which has been on the market for a little over a year.
Without an approval in hand, investors are rightfully discounting Orexigen. Or put another way, Orexigen should have a similar value to Arena Pharmaceuticals and VIVUS once investors are convinced that it has the same potential as the other two.
An approval of Contrave looks highly likely after Orexigen successfully completed all the FDA's requests from an earlier rejection. Orexigen has the potential to double in value next year, which could make it one of 2014's top health-care stocks.
2014 Top health-care stock No. 2: Swinging for the fences
Geron (NASDAQ: GERN ) has a potential blockbuster on its hands; in a small clinical trial, some myelofibrosis patients taking its imetelstat went into complete remission.
Geron needs to run a larger clinical trial to confirm the results. Assuming imetelstat works as well in the larger trial and doesn't show any unmanageable side effects, imetelstat will be a blockbuster for sure.
Of course, that's easier said than done, but the potential reward looks like it's worth the risk. Geron has a market cap around $650 million while Incyte, which sells Jakafi -- the only approved drug to treat myelofibrosis -- is an $8 billing company. Based on the data so far, imetelstat appears to be a better drug than Jakafi, which treats the symptoms of myelofibrosis, but is far from a cure.
2014 Top health-care stock #3: The pharma stalwart
It's going to be hard for Johnson & Johnson (NYSE: JNJ ) to match its amazing 2013 -- up over 30% this year -- but there's rarely a bad time to buy. If you're going to own a large cap health-care stock for the long-term, you can't go wrong with Johnson & Johnson.
If the first two health-care stocks perform to their highest potential, Johnson & Johnson won't be the top stock in 2014. But the conservative nature of the pick means you're not likely to get hurt as bad if a drug or two fails to perform up to expectations.
And the dividend, producing a yield a little under 3%, will deaden any blow. With 51 consecutive years of dividend increases, it seems safe to assume Johnson & Johnson will increase the dividend in 2014 as well.
Our top pick for 2014 across all sectors
There's a huge difference between a good stock, and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.