Healthcare represents nearly one-fifth the U.S. economy. And demand for healthcare products and services is growing. You might think that there would be plenty of healthcare stocks are popular with hedge funds.
Personal finance website WalletHub ranked the top 25 most popular stocks owned by hedge funds in the fourth quarter of 2017 based on SEC filings. Interestingly, only three were healthcare stocks -- UnitedHealth Group (NYSE:UNH), Johnson & Johnson (NYSE:JNJ), and AbbVie (NYSE:ABBV). Here's what makes these three stocks so well liked.
UnitedHealth Group was the most popular healthcare stock among hedge funds, ranking No. 10 on the WalletHub list. The company ranks higher on a couple of other lists, though: UnitedHealth Group is the largest health insurer in the U.S., and the company operates the country's third-largest pharmacy benefits manager (PBM).
The stock performed quite well in 2017, with UnitedHealth Group's 38% gain handily beating the market. All of the company's business segments posted solid revenue growth last year, especially its OptumHealth unit, which provides care delivery, care management, wellness and consumer engagement, and health financial services.
UnitedHealth Group's future looks good as well. U.S. tax reform puts the company in great shape to increase revenue and earnings in 2018. With the likelihood of a full repeal of Obamacare unlikely after failed attempts last year, the company's Medicaid business seems secure. UnitedHealth Group's continued expansion into areas outside of health insurance and PBM services also should create new growth opportunities.
Johnson & Johnson
Johnson & Johnson came in No. 16 on the list of most popular stocks among hedge funds. J&J is the largest healthcare company in the world, with a market cap of close to $350 billion. The company operates through three business segments -- consumer healthcare, medical devices, and pharmaceuticals.
Although Johnson & Johnson stock's performance wasn't as impressive as UnitedHealth Group's was in the past year, the healthcare giant still achieved a nice 21% gain in 2017. A primary key to J&J's success was making acquisitions. The company bought Abbott Labs' medical optics business and Swiss drugmaker Actelion Pharmaceuticals last year, both of which contributed to increased revenue.
One thing that hedge funds and ordinary investors alike love about Johnson & Johnson is its huge cash flow. The healthcare giant practically mints money, generating free cash flow of nearly $17.8 billion over the last 12 months. J&J uses its cash flow to reward shareholders through dividends and share buybacks, as well as invest internally and externally to fuel more growth.
AbbVie took the No. 21 spot among the most popular stocks owned by hedge funds. However, the big pharma was the only healthcare stock on WalletHub's list that hedge funds actually increased their stakes in during the fourth quarter.
Buying more shares in AbbVie was a smart thing to do. The stock soared 54% in 2017 and is up 16% so far this year. One big factor driving AbbVie stock higher is that its top-selling drug Humira appears to be safe from biosimilar competition in the U.S., thanks to a deal made with Amgen last year.
But while AbbVie still relies heavily on Humira, the company has several other up-and-coming products. Sales for cancer drug Imbruvica and hepatitis C drug Mayvret are rising quickly. With its strong current products and a deep pipeline, AbbVie should be able to grow earnings by 17% on average annually over the next few years.
I like all three of healthcare stocks overall. However, I think the best pick right now is AbbVie.
If you're focused on growth, AbbVie claims the best growth prospects of the healthcare stocks ranked in the top 25 most popular stocks for hedge funds. If you like solid dividends, AbbVie takes the top honor in that category as well, with a dividend yield well above J&J's and UnitedHealth Group's. Value-oriented investors should also like AbbVie's valuation metrics that are more attractive than the other two healthcare stocks.
AbbVie CFO Bill Chase recently stated that the company has "a growth story that will be the envy of the industry." I agree. And I would add that AbbVie also has a dividend story and a valuation story that should be the envy of not only the pharmaceutical industry, but also the healthcare sector as a whole. There's a good reason why hedge funds like AbbVie -- and why other investors should like it also.