Healthcare makes up nearly one-fifth of the U.S. economy. And with the country's aging demographics, the healthcare sector will almost certainly continue to grow. As you might expect, such a large and expanding area presents lots of opportunities for investors.
We asked three Motley Fool healthcare contributors to weigh in on which stocks they think are great picks for long-term investors right now. Here's why they selected CVS Health (CVS 1.49%), Guardant Health (GH -3.60%), and Teladoc Health (TDOC -1.52%).
Check out the latest Teladoc, Guardant, and CVS earnings call transcripts.
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This compelling value stock is cheaper than it's been in a long time
Sean Williams (CVS Health): One of my favorite things to do as an investor is the exact opposite of everyone else. That's why CVS Health, which has struggled mightily of late, is my top healthcare stock to buy this month.
Following the release of its fourth-quarter and full-year results on Wednesday, Feb. 20, CVS Health's stock dived. The integrated health giant laid out a series of concerns, including higher costs to fully integrate its $70 billion Aetna acquisition, uncertainty regarding drug rebates, and worries about drug-price reform and a lack of brand-name drug inflation. All told, given higher expensing and some core business uncertainties, CVS Health forecast full-year EPS for 2019 between $6.68 and $6.88, which was notably lower than the $7.41 that Wall Street had been looking for.
Some folks might call this a perfect storm of bad news. I call it a fantastic buying opportunity for a company primed to reinvent itself.
To begin with, we've been hearing about the Trump administration's attempts to curb prescription drug inflation for a while. However, nothing has ever come of this discussion, because there's little consensus in a highly partisan and currently divided Congress. Drug-price reform is often much ado about nothing, and my belief is that investors are once again worrying about the possibility of shrinking pharmacy margins that are simply not in danger of declining.
More important than just my belief is the real growth that CVS Health's acquisition of Aetna brings to the table. CVS' pharmacy-benefit management business and front-end sales are generally low-margin operations. Aetna's health insurance business, while not traditionally thought of as high growth, will actually improve CVS' top-line growth and margins. Not to mention, there should be as much as $750 million in annual cost synergies by 2020. Though this may be an unpopular deal now, it has the potential to become a serious moneymaker for investors given some time.
Lastly, the fundamentals just make sense. Over the past five years, CVS Health has averaged a forward P/E of 14.1. Currently, it's looking at what'll likely be a forward P/E for 2020 of under 9, which is a nice bargain. Add on a dividend yield that's nearing 3%, and you have a compelling value stock with strong branding to sock away for the long term.
Swinging for the fences
Brian Feroldi (Guardant Health): Every now and then, a company comes along that is so promising that I'm willing to look past my investing checklist and give it a chance. From what I've seen thus far, Guardant Health could be one of those rare companies.
Guardant is an early leader in the incredibly exciting field of precision medicine. The company's technology promises to enable healthcare professionals to diagnose and characterize cancer by using a simple noninvasive blood test. That's an incredibly exciting advance because the current standard-of-care diagnostic methods for many types of cancer require tissue biopsies. Collecting a tissue sample can often require surgery and can be very expensive. This makes Guardant's "liquid biopsy" solution highly appealing.
While these are still very early days for Guardant, there are ample reasons for optimism. More than 6,000 oncologists have already ordered 80,000 tests to use Guardant's technology in detecting late-stage cancer. That's impressive, but it is just a drop in the bucket when compared with the 700,000 U.S. patients who need advanced-stage cancer detection each year. The numbers could also expand exponentially if Guardant can ultimately win Food and Drug Administration approval for use in screening, early detection, and recurrence monitoring.
How big could the pie be if everything works out? Management pegs the number at $35 billion in annual revenue in the U.S. alone. That's an enormous figure for a company that currently boasts a market cap of $3.6 billion.
Having said all that, Guardant is still in cash-burning mode and is expected to be there for some time. But the opportunity ahead is so large that nibbling on the stock today could make sense for risk-loving healthcare investors.
The clear leader in a high-growth space
Keith Speights (Teladoc Health): What if you didn't have to spend time traveling to your doctor's office and sitting in a waiting room around patients who could be even sicker than you are? And what if you could do this and actually lower the total cost? This is possible with telehealth. And Teladoc Health is the clear leader in telehealth services.
The company has more than 12,000 customers in over 125 countries. These customers include around 40% of the Fortune 500. In addition, Teladoc Health partners with more than 35 major health plans and over 290 hospitals and health systems. Its revenue has soared by a sizzling compound annual growth rate of 75% over the last five years.
But adoption of telehealth services is still pretty much in its infancy. As baby boomers age, the need to control runaway healthcare costs will only become more important. Telehealth is a great alternative to help in this effort. Teladoc, with its unparalleled array of services and its global presence, appears to be in a great position to be one of the biggest winners.
Teladoc has had a few distractions over the last few months, including short-seller allegations about its marketing practices for its BetterHelp mental health subsidiary and issues involving CFO Mark Hirschhorn. These are only temporary concerns, though. Teladoc Health looks like a great long-term healthcare stock you can buy right now.
