Over the past five years, healthcare stocks as a whole have been practically unstoppable. While the broad-based S&P 500 is up 73% over that period, the iShares US Healthcare ETF has grown 107%. Taking into consideration America's demographics -- and its rapidly growing population of senior citizens -- healthcare could be the perfect place to park your money for the long run.
But, which healthcare stocks should you consider buying? We posed that question to three of our Foolish healthcare contributors, and they came back with these three recommendations: Intuitive Surgical (NASDAQ:ISRG), McKesson (NYSE:MCK), and ResMed (NYSE:RMD).
This stock has cutting-edge growth potential
Sean Williams (Intuitive Surgical): Though there are hundreds of stocks to choose from when investing in healthcare, a personal favorite of mine can be found in the device segment: Intuitive Surgical.
Intuitive Surgical manufactures and services the da Vinci robotic surgical system, which is currently used for urology, gynecology, and other general surgeries and cardiothoracic procedures. There are a handful of reasons why this robo-assisted surgical device company is the one to own.
For starters, the company ended September 2016 with more than 3,800 installed da Vinci systems worldwide, which is so far ahead of its closest competitor it's almost laughable. It takes time to build up a network of physicians who are capable of using such machines, meaning there's a strong likelihood that Intuitive Surgical will retain its market share dominance for at least the next decade, in my opinion. Not to mention, being the industry leader by such a wide margin adds to its pricing power and also discourages existing customers from even thinking about switching to a competitor's device.
The real allure of Intuitive Surgical, however, is its "razor-and-blades" business model. You might think that the da Vinci operating systems, which come with a price tag ranging from $600,000 to $2,500,000, would be its bread-and-butter when it comes to sales and profits, but that couldn't be further from the truth. It's the company's annual service agreements and the fresh instruments and accessories it supplies for each procedure that prove to be its high-margin moneymakers.
Intuitive Surgical also has plenty of avenues with which to expand its top-line growth. In particular, given that it now has a less than 10% market share in colorectal, ventral hernia, and thoracic surgery, and only around a third of the market in benign hysterectomy surgeries, there's ample room for it to grow sales of da Vinci surgical systems.
While Intuitive Surgical might look pricey on a fundamental basis, it has 10%-plus annual growth potential through at least 2020, if not beyond, making it an intriguing healthcare stock to considering investing in.
An American oligarch
Cory Renauer (McKesson): This country might not have a royal family, but there is a three-member oligarchy that sources, warehouses, and distributes the vast majority of America's prescription drugs. My pick for a healthcare investment happens to be the largest of the three by revenue.
This is a great stock for beginning healthcare investors because the enduring advantages it enjoys over smaller competitors due to economies of scale should make it easier to hang on to for the long term. There just aren't any companies outside of the big three that can maintain profitability while sourcing, warehousing, and delivering drugs at comparable prices. Just look at the razor-thin margins McKesson maintains: It recorded a $3.12 billion operating profit during the last twelve months from a whopping $196.5 billion in total revenue.
Although the company is well positioned for decades of profitability, the stock is fairly cheap at the moment. Increasing payer pushback on the prices of branded prescription drugs has squeezed McKesson's margins in recent quarters. This might hamper growth in the short term, but it also strengthens the company's advantage over smaller competitors.
Income investors of all persuasions will appreciate the company's commitment to returning profits. Its dividend offers a meager 0.75% yield at recent prices, but massive share repurchases have lowered the outstanding share count by 8.6% in two short years. Another $3 billion earmarked for further repurchases at the end of 2016 would lower the count by another 9.4% at recent prices.
Breathe easy with this stock
Brian Feroldi (ResMed): Did you know that nearly 20% of Americans suffer from some form of sleep-disordered breathing? That might not sound like a big deal, but patients with this condition have a greatly increased risk of developing obesity, heart disease, diabetes, and more.
A few decades back, ResMed created a treatment option for these patients called continuous positive airway pressure, or CPAP. This treatment utilizes a pump and a mask to help ensure that a patient's airway remains clear throughout the night. This simple but effective solution has slowly caught on, and the company now has millions of customers around the world.
Over the years, ResMed has launched a number of new products that help diagnose or treat a number of sleep disorders. That's helped grow it into a highly profitable business that currently sports a market cap in excess of $10 billion.
Despite its size, ResMed believes that it has only just scratched the surface of what's possible. The company estimates that its penetration rates in developed markets like the U.S. and Europe are still under 15%, while penetration rates in emerging markets like China, India, and Brazil remain under 1% penetration. That suggests that ResMed has plenty of room left for expansion, which is why I think this is a great healthcare stock to buy and hold for the long-term.
Brian Feroldi owns shares of Intuitive Surgical. Cory Renauer has no position in any stocks mentioned. Sean Williams has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Intuitive Surgical. It also recommends McKesson and ResMed. The Motley Fool has a disclosure policy.