Confucius, the great Chinese philosopher, once said, "Study the past if you would define the future." Although Confucius wasn't much of an investor, his statement certainly applies to investing.
Investors are always looking to find the next stock that's going to deliver huge returns. Perhaps the best place to start in that quest is to research the stocks that have already delivered huge returns. That's the approach I used in an attempt to identify the healthcare stocks that are likely to become the biggest winners of the coming decades.
I looked back in time to find out why the best healthcare stocks performed so well. And then I researched other healthcare stocks to see which of them best exemplified those winning attributes. Here's what I found: the greatest healthcare stocks of the 21st century -- and some that probably will be.
The greatest so far
I looked at the total return (which includes stock appreciation and reinvested dividends, if any) between Jan. 1, 2001, and Sept. 24, 2018, of every healthcare stock that's still actively trading on the market with a current market cap of at least $2 billion. Out of this universe of stocks, three clearly topped all others in total return.
USANA Health Sciences (USNA -1.05%) ranked at the top of the list with an astounding total return of more than 32,000%. The company develops nutritional and personal-care products. USANA uses a multi-level marketing approach to sell its products across the world. Last year, less than 12% of its total revenue was made in the U.S.
The No. 2 best-performing healthcare stock of the 21st century so far is Intuitive Surgical (ISRG -2.38%), which has generated a return of more than 9,800% since Jan. 1, 2001. Intuitive Surgical was the first company to pioneer robotic surgical systems. The company's da Vinci robotic surgical systems were installed at over 4,400 customer sites as of the end of 2017.
You might be surprised by the third-greatest healthcare stock of the century thus far: It's Cronos Group (CRON -2.58%). The Canadian marijuana grower has delivered a gain of nearly 7,300% since it first began trading on the Toronto Stock Exchange and over the counter in the U.S. in 2016. Cronos listed its stock on the Nasdaq stock exchange on Feb. 27, 2018.
What they have in common
USANA, Intuitive Surgical, and Cronos Group might seem like they're as different as they could possibly be. But these three top healthcare stocks have several things in common that could be key to determining stocks that might be the big winners of the future.
One important common denominator is that all three companies started out with small-cap valuations or lower. At the dawn of the 21st century, Intuitive Surgical's market cap stood at $363 million, while USANA's market cap was around $15 million. Cronos Group's market cap when it first went public a couple of years ago was around $12 million. Stocks with lower market caps have a lot more room to run than large-cap stocks do.
All three of these companies also are very innovative. That's obvious with Intuitive Surgical. Prior to da Vinci, there weren't any robotic surgical systems. Intuitive also continues to innovate by developing new products to extend the use of da Vinci into more types of procedures.
USANA relies on innovation to launch new products and grow sales. The company especially has focused on more personalized products in recent years, such as its Celavive skin care system that can be used for multiple skin types.
While Cronos Group operates in a commodity business, the company also places a high priority on innovation. Many of Cronos Group's innovative developments are focused on improving how the company grows and processes cannabis, including its custom-built carbon dioxide extraction equipment for eliminating the requirement for post-processing of marijuana plants, and its partnership with Ginkgo Bioworks to develop new methods to produce high-quality, low-cost cannabinoids.
Perhaps the most critical commonality for USANA, Intuitive Surgical, and Cronos Group is that they all have benefited from (and should continue to benefit from) significant macro trends. The biggest trend helping fuel USANA's success is the expanding middle-class populations across the world. For example, the company is enjoying its greatest growth in the Greater China region.
Intuitive Surgical, meanwhile, continues to profit from the long-term trend of aging demographics in the U.S. and other major countries. The growing number of older individuals drives higher demand for the types of procedures for which Intuitive's da Vinci system is most frequently used.
You probably can guess what macro trend is propelling Cronos Group's fortunes. Increasingly, more countries have legalized marijuana either for medical or recreational use. Some predict that the global marijuana market could top $150 billion in the future, giving Cronos a tremendous growth opportunity.
Looking for the greatest of the future
A sample size of only three stocks is admittedly too small to reach reliable conclusions for attempting to identify the most likely candidates to generate huge returns in the future. However, the common denominators for USANA, Intuitive Surgical and Cronos -- small-cap or lower beginning valuations, reinvesting capital into expanding the business, a commitment to innovation, and the ability to profit from significant macro trends -- were also in place for most, if not all, of the other best-performing healthcare stocks that I found.
Which stocks meet these criteria that could join the ranks of the greatest healthcare stocks of the 21st century? There are quite a few, but three that I find especially intriguing are BioTelemetry (BEAT), Editas Medicine (EDIT -9.32%), and Viking Therapeutics (VKTX 2.13%).
All three of these stocks, just like our biggest winners of the century so far did initially, claim relatively small valuations. BioTelemetry is the biggest of the three with a market cap of around $2 billion. Editas' market cap currently stands at roughly $1.5 billion. Viking Therapeutics trails behind with a market cap of $1.1 billion.
These three healthcare companies are textbook examples of innovation. BioTelemetry develops remote cardiac monitoring technology that boasts high accuracy and relatively low costs. The company's ePatch wireless cardiac sensor was selected by Apple to be part of its Apple Heart Study, which uses the Apple Watch, iPhone, and ePatch to monitor cardiac arrhythmias in individuals.
Editas Medicine is one of the leading pioneers of CRISPR gene editing, a technology that some have described as the biggest biotech discovery of the century. The biotech plans to submit for approval by the end of the year to begin a clinical study of its gene-editing therapy targeting treatment of Leber congenital amaurosis type 10 (LCA10), the top cause of genetic childhood blindness. If it gets a green light from the Food and Drug Administration (FDA), Editas likely will become the first biotech to conduct clinical testing in humans in the U.S. of a CRISPR therapy delivered in vivo (administered in the body).
Viking Therapeutics recently reported great results from a phase 2 clinical study of experimental drug VK2809 in treating nonalcoholic fatty liver disease (NAFLD) and high cholesterol. The biotech also has a promising pipeline candidate in late-stage testing for strengthening muscles and bones following hip surgery.
Are there trends that should serve as major tailwinds for these three small stocks? You bet. An aging population helps both BioTelemetry and Viking Therapeutics. Mobile health, or mHealth, is widely viewed as a critical way to control healthcare costs and improve care with an older population. BioTelemetry stands at the forefront of mHealth. Older individuals are more likely to suffer from NAFLD, including non-alcoholic steatohepatitis (NASH), and they're more likely to require hip surgeries. This works to Viking's benefit should the biotech win approvals for its two lead candidates.
As for Editas Medicine, focusing on rare genetic diseases has become a trend in the 21st century more than ever before. In addition, CRISPR gene editing holds the promise of being used to engineer immune cells to treat non-genetic diseases such as cancer, which occurs more often in older patients.
More investing wisdom from Confucius
I suspect that Confucius is on to something about studying the past to define the future. My view is that the qualities that helped the best healthcare stocks of the century so far also will likely be present in the greatest stocks of the future. I think there's a pretty good chance that BioTelemetry, Editas Medicine, and Viking Therapeutics could be high on the list of top performers several years from now.
But there's a couple of other quotes from Confucius that investors should also note. Here's one: "To know what you know and what you do not know, that is true knowledge." The other is: "The cautious seldom err."
It's great to know what common denominators past healthcare winners possessed. Looking for those attributes in other stocks isn't a bad approach. The reality, though, is that we can't know for sure which stocks will be the biggest winners.
Betting the farm on any one stock in hopes that it will generate ginormous returns isn't a smart thing to do. But making smaller investments in a number of stocks that have what it takes to be big winners can pay off tremendously. Taking this approach boosts your chances significantly of owning stocks that could become the greatest of the 21st century.