Healthcare stocks, in general, are badly underperforming the S&P 500 so far this year. In fact, the S&P 500 index has delivered a year-to-date return that triples the return of the Health Care Select Sector Index, which consists only of healthcare stocks in the S&P 500.
As always, though, there are exceptions. Three healthcare stocks are not only beating the S&P 500 this year, they're at all-time highs. AstraZeneca (NYSE:AZN), Baxter International (NYSE:BAX), and Zoetis (NYSE:ZTS) are sizzling hot right now. But are these hot healthcare stocks smart picks for investors to buy?
British drugmaker AstraZeneca is up 17% so far in 2019. Most of that gain has come in just the last few weeks after the company reported encouraging second-quarter results.
AstraZeneca's oncology lineup is firing on all cylinders. Total oncology sales for the company in the first half of 2019 soared 52% year over year. The biggest moneymaker right now, Tagrisso, made over $1.4 billion in the first six months of the year, up 86% over the same period in 2018.
But AstraZeneca claims two cancer drugs that are growing even faster than Tagrisso. Sales of Imfinzi skyrocketed 248% in the first half of 2019 to $633 million. Sales of Lynparza nearly doubled to $520 million.
AstraZeneca is scheduled to present data in September that could drive the stock even higher. The big pharma company plans to report results from Imfinzi in combination with chemotherapy as a first-line treatment for small cell lung cancer (SCLC), and for Lynparza in combination with chemotherapy in treating relapsed SCLC patients.
Baxter's shares have jumped 32% year to date. Unlike AstraZeneca, Baxter generated most of its gains in the first quarter of 2019. However, the two healthcare stocks have one thing in common: Positive quarterly updates served as their major catalysts.
In January, Baxter reported its 2018 fourth-quarter results. Those results weren't overly impressive at first glance. Baxter's Q4 revenue increased by only 2% year over year. However, the company's adjusted earnings per diluted share rose 22% from the prior-year period. More importantly, Baxter easily beat Wall Street estimates.
The company followed up with good news in its first-quarter and second-quarter updates. In both quarters, Baxter topped analysts' estimates. It also boosted its full-year 2019 earnings guidance after its Q2 earnings beat.
Baxter should have growth opportunities ahead as the home hemodialysis market picks up momentum. In addition, the company is launching several new products, including intravenous insulin product Myxredlin and intravenous nutrition product Clinolipid.
Zoetis is the biggest winner of these three high-flying healthcare stocks so far this year, with its shares soaring 46%. And if you guessed that great quarterly results have been the key to the animal health company's success, you're exactly right.
The company topped Wall Street analysts' earnings estimates in every quarterly update thus far in 2019. As was the case with Baxter, the top-line results reported by Zoetis weren't necessarily awe-inspiring. For example, in the company's second-quarter results, Zoetis announced year-over-year revenue growth of 8%. However, the company's adjusted earnings-per-share growth of 17% was more impressive.
Investors continue to like Zoetis a lot for several reasons. The company ranks as the biggest player in the animal health market. That market is expected to grow in the future, particularly as middle classes in developing nations expand and eat more meat and pet ownership rises.
Zoetis is also growing through acquisitions. In July, the company announced that it was buying Platinum Performance, a company that develops nutrition solutions for cats, dogs, and horses. The deal is expected to close in the third quarter of this year.
Are they buys?
My view is that AstraZeneca, Baxter, and Zoetis are good businesses with solid prospects. But does that automatically qualify them as great stocks to buy right now? Not necessarily.
In large part because of their tremendous performance so far in 2019, all three stocks have relatively high valuations. While AstraZeneca, Baxter, and Zoetis will likely deliver double-digit percentage average annual earnings growth over the next few years, those growth prospects are largely baked into their share prices already.
I like the three companies. For now, though, I like too many other stocks more to get enthusiastic about AstraZeneca, Baxter, or Zoetis.