If you're looking for great investing opportunities, you really need to check out healthcare stocks. From biotech to health insurance to medical devices, there are plenty of solid choices. But which are the best stocks in healthcare?
To me, the best stocks in any industry are the ones that have the strongest growth prospects with the least level of risk associated with that growth. I reviewed many excellent stocks using this criteria, but eventually narrowed the list down to just a handful. Here's why Align Technology (NASDAQ:ALGN), Celgene (NASDAQ:CELG), and Vertex Pharmaceuticals (NASDAQ:VRTX) are the three best stocks in healthcare in my view.
I recently tweeted that Align Technology is the "Tesla of teeth." And that wasn't much of an exaggeration. The company makes clear dental aligners that are practically invisible -- a game-changing innovation in the orthodontic industry. Align also sells intra-oral scanners that are used by dental professionals to create 3D models of patients' teeth. These 3D models are then used to design clear aligners customized for the patients.
Align stock has soared in recent years, along with the company's sales and earnings. Wall Street analysts project the company will grow earnings by more than 25% over the next five years. That seems quite attainable, considering that Align's Invisalign clear aligners currently claim less than 10% of the addressable market. The company is actively working to develop new versions of its products that can be effective in more severe cases of teeth misalignment. Align is also expanding internationally.
What about risk? Align does face loss of some of its patents for Invisalign. However, the company has built a big head start on potential rivals by forging relationships with orthodontists and dentists. Align's infrastructure for customized manufacturing of clear aligners also gives it a competitive advantage. I think this healthcare stock will continue to dominate its niche market for a long time to come.
My personal favorite healthcare stock is Celgene. The biotech has been a big winner for me over the past few years, thanks in large part to continued sales momentum for its top drug, Revlimid. That momentum doesn't seem likely to slow down: Revlimid is on track to be the top-selling cancer drug in the world by 2022 with annual sales of more than $14 billion.
Celgene forecasts adjusted annual earnings growth of 22% over the next few years. That's in line with Wall Street projections. I expect the biotech will deliver this strong growth with its current lineup and several promising new drugs on the way. In addition to Revlimid, Celgene claims two other blockbusters in Pomalyst and Otezla and a near-blockbuster drug with Abraxane. The company also thinks it will win regulatory approval by 2022 for 10 more candidates that have the potential to generate annual sales of at least $1 billion.
It's entirely possible, though, that Celgene's pipeline expectations could prove to be overly optimistic. However, the biotech has so many strong candidates that a setback or two still wouldn't derail its tremendous growth prospects. Celgene also could (and probably will) make more deals with smaller biotechs that give the company even more cushion.
Of these three healthcare stocks, Vertex ranks as the biggest winner so far in 2017. The biotech's share price has more than doubled year to date, on positive clinical results for its experimental cystic fibrosis (CF) drugs and solid performance for its two current CF drugs on the market -- Kalydeco and Orkambi.
Wall Street thinks Vertex will be able to grow earnings by a whopping 68% annually over the next five years. That might seem a tough trick to pull off, but I agree that Vertex should be able to do it. If the biotech wins regulatory approval for its tezacaftor-Kalydeco combo for treating CF, its potential market should increase by around 50%. And if Vertex's three-drug combos currently in the pipeline are successful, they could help expand the market nearly 40% more.
Although Vertex would be hurt tremendously by a significant clinical setback, the company's chances of pipeline success appear to be pretty good based on previously announced results. Vertex also could face some competition down the road. However, the biotech has a nice head start over its rivals.