2017 was a great year for most healthcare investors. The Vanguard Health Care ETF (VHT 0.78%) -- which is a popular exchange-traded fund that owns 374 healthcare stocks -- gained more than 21% in 2017. Plenty of individual stocks performed even better.
But which healthcare stocks, in particular, are top buys for the year ahead? Here's why Masimo (MASI 0.11%), Veeva Systems (VEEV 1.14%), and Abiomed (ABMD +0.00%) are three of my top picks.
Image source: Getty Images.
Masimo
Masimo is a medical device maker that specializes in noninvasive patient monitoring technologies. While the company sells an array of products, its bread-and-butter business is pulse oximeters. These devices are used to track oxygen levels in the blood, which is critical information for healthcare providers to have when they are dealing with patients in need of acute care.
Masimo's pulse oximeters are widely viewed as the world's best, which is why the company's devices are used in 17 of the top 20 hospitals in the U.S. That's great news for investors because this is largely a razor-and-blade business. With 1.5 million devices in use worldwide, customers can be counted on to reorder supplies on a regular basis. This helps makes Masimo's financial statements highly predictable.
Moving forward, I see several reasons to believe Masimo can remain in growth mode. First, the overall market for pulse oximetry devices looks poised for steady growth, especially in developing countries. Second, the company's partnership with Dutch giant Royal Philips dramatically expands its global reach. Finally, the company has its eyes on adjacent market opportunities that could benefit from its expertise. Near-term opportunities include devices that help with sleep disorders and even telehealth.
When combined with regular stock buybacks and margin improvements, I think the odds are favorable that Masimo can continue posting double-digit earnings growth for the foreseeable future.
Veeva Systems
Salesforce.com (CRM 2.43%) kicked off the software-as-a-service (SaaS) movement nearly two decades ago, and investors who bought in early to the company's vision were hugely rewarded. However, Salesforce.com's platform isn't well suited for some industries. For example, the pharmaceutical sector was late to join the movement to the cloud because of the unique regulatory challenges it faces.
This mismatch was noticed by Veeva Systems' founder just over a decade ago. Sensing opportunity, he left his cushy job at Salesforce.com and created a SaaS company from the ground up that was tailor-made for the pharmaceutical industry.
Image source: Getty Images.
Fast forward to today, and Veeva Systems is now the dominant SaaS company in the life sciences space. The company sells software that helps its clients with a wide range of industry-specific challenges such as customer relationship management, reporting, data collection, clinical trials management, regulatory requirements, and more.
These must-have features have attracted a who's-who list of clients. As a result, Veeva has been posting strong growth numbers ever since it hit the public market.
Looking ahead, Veeva's growth plan centers around rolling out new products and customizing its software for use in other highly regulated industries (chemical makers and consumer packaged goods companies represent sizable near-term opportunities). When added together, Veeva's management believes revenue will grow around 20% annually for the foreseeable future. Now that the company has reached scale, I think profits and cash flow can grow at an even faster rate.
Abiomed
Abiomed is a medical device maker focuses on heart disease. More specifically, the company sells a line of miniaturized heart pumps that can be used during surgery to help ensure that a patient's blood flow remains strong. This can dramatically increase a patient's odds of survival.
Heart surgeons everywhere have warmed up to Abiomed's innovative solution over the last few years. As a result, Abiomed's revenue has been soaring. What's more, the company has achieved profitable on a GAAP basis, and operating leverage is really starting to kick in. This has enabled profits to grow at an even faster rate.
While Abiomed's performance thus far has been impressive, I think the good times are here to stay. More than 700,000 Americans suffer from a heart attack each year, and this number is (sadly) likely to rise over time as the baby-boomer generation continues to age. That paints a nice backdrop for continued adoption of Abiomed's pumps in the states. Meanwhile, the international opportunity continues to look huge, especially now that Abiomed received reimbursement approval in Japan.
There's ample reason to believe this high-growth stock is still in the early innings of its growth phase.
Will these stocks deliver in 2018?
While none of these stocks are particularly cheap right now -- they all trade for greater than 30 times forward earnings -- I think all three boast rock-solid business models that can be counted on to deliver double-digit profit growth over the long term. That's why I think all three stand a good chance of outperforming in 2018 and beyond.
