The healthcare market is huge. Americans alone spend more than $3 trillion each year to keep healthy. The numbers only get crazier when you include the rest of the world.
A market that big is bound to create opportunities for investors. So which healthcare stocks do we have our eyes on right now? We asked a team of Motley Fool contributors to weigh in, and they called out Insulet (PODD 0.77%), HealthEquity (HQY 1.93%), and CVS Health (CVS -0.48%).
Buying this diabetes stock now could pay off
Todd Campbell (Insulet): Investor interest in Insulet slipped following Tandem Diabetes Care's (TNDM 0.13%) foray into automated insulin delivery last year. However, shares could rebound ahead of Insulet's own automated solution launching in 2020.
Despite Tandem Diabetes' t:slim X2 rollout, Insulet still managed to deliver solid double-digit sales growth last year. Expanded Medicare and Medicaid access helped full-year revenue increase 22% to a record $563.8 million. Sales growth and improving margins because of volume growth and bringing European sales in-house resulted in Insulet reporting its first full-year operating profit last year, too.
In 2019, shifting to the pharmacy channel will create a $68 million revenue headwind because it eliminates upfront product revenue; however, the move to pay-as-you-go pricing is expected to be revenue neutral for the full year. Insulet expects sales will climb 17% to 22%, to between $662 million and $687 million this year. Also, management expects a mid-single-digit operating margin this year, despite R&D and manufacturing investments.
The launch of its Horizon automated insulin system in the second half of 2020 could be a significant catalyst. Management is targeting over $1 billion in sales and mid-teens operating margin in 2021. The potential for ongoing Omnipod growth and Horizon's availability next year suggest this company's on the cusp of a big move higher over the next couple years.
Riding a mega-trend
Brian Feroldi (HealthEquity): I'm a picky investor. I only like to get behind companies that are growing fast, have a great management team, are addressing a massive opportunity, and are already profitable. That's asking a lot of any business, but HealthEquity aces my test with ease.
HealthEquity is the No. 2 provider of health savings accounts (HSAs) in the U.S. HSAs have taken off in popularity over the last decade because they offer a triple-tax benefit that helps employers and employees to reduce their health insurance costs.
This might sound like a boring business, but it produces mouth-watering financials. HealthEquity monetizes its customers in four separate ways, which makes its top line very predictable. The company has also reached a scale that allows it to crank out consistent profits and drive its margins higher. These factors have led to amazing growth on the bottom line.
HealthEquity's financial statements alone make this a great business to study, but I'm equally as impressed with the people running the show. The company's founder is a former trauma surgeon and also the younger brother of JetBlue's founder. HealthEquity CEO Jon Kessler is an entrepreneur himself and gets high praise from employees on sites like Glassdoor.
To top it all off, HealthEquity believes that it is still in the very early days of its growth phase and that the opportunity ahead of the business is huge. Wall Street agrees and is currently projecting that earnings will grow in excess of 24% annually over the next five years.
HealthEquity checks off all of the boxes that I look for in a great investment. When that happens, I don't mind paying up to get my hands on the stock. That's why I think the company is still a great company to check out today, even though shares are trading for more than 60 times next year's earnings estimates.
A one-stop shop for the most common healthcare needs
Chuck Saletta (CVS Health): If you've ever needed more healthcare than a standard checkup or basic preventive services, you probably know how confusing and time-consuming the process can be. The doctor, the insurance company, the pharmacy, the lab service, and virtually everyone and everything else involved all have their own sets of processes, guidelines, and paperwork.
With all that is involved, you almost can't help but wonder how much of the cost is driven by the overhead and other process and paperwork, rather than the actual practice of medicine itself. There's clearly a need to break through all that clutter and drive efficiency, simplification, and streamlined healthcare service delivery. If there's one company that's well positioned to do that, it's CVS.
Since its recent acquisition of health insurer Aetna, CVS now operates a substantial vertically integrated healthcare delivery system. You can get insured by CVS/Aetna, seek out basic healthcare at a Minute Clinic inside a CVS store, get your prescription filled at the CVS pharmacy, and find over-the-counter treatments on CVS' shelves. With one company in the mix instead of several, it should be possible to minimize the overhead costs, delivering savings to consumers while still earning a fair return.
Despite that incredible potential, CVS' shares can be purchased at a relative bargain of less than eight times the company's anticipated earnings. At that price, combined with its 3.8% yield, even if the company doesn't revolutionize healthcare delivery, investors buying today are getting a decent chance at a reasonable return for their risks.