The spread of the coronavirus disease 2019 (COVID-19) has turned societal habits and equity markets on their heads. As of this past Wednesday, more than 1.5 million confirmed cases of COVID-19 had been identified globally, with almost 88,000 deaths attributed to the disease. Despite ongoing efforts by drugmakers to find treatment options and develop antiviral vaccines, there's no doubt that we'll be dealing with the physical and economic toll of the coronavirus pandemic for many months to come.
However, this unprecedented event has created a once-in-a-generation buying opportunity for those folks lucky enough to be healthy and sitting on an ample emergency fund. The question is, where to put that capital to work?
Here's why healthcare stocks should be on your buy list
One of the more logical sectors to consider is healthcare. Although healthcare is traditionally high-growth, and high-growth industries and sectors are often clobbered during bear markets, it's far more defensive than you probably realize.
Think about it this way: We don't get to choose when we get sick or what ailment(s) we develop, therefore demand for most healthcare companies tends to remain consistent, regardless of how well or poorly the economy is performing due to COVID-19. If patients needed prescription pharmaceuticals last month, there's a good chance they're going to need them in April and beyond. The same goes true for healthcare products and medical equipment.
To boot, Democratic Party presidential candidate Bernie Sanders dropped out of the race this past week, all but cementing the idea that we're going to see former Vice President Joe Biden win the Democratic Party nomination, and incumbent Donald Trump on the Republican Party ticket. Neither Trump nor Biden have touted significant healthcare reforms, which likely means plenty of pricing power and substantive growth opportunities lie ahead for healthcare stocks.
Two top healthcare stocks you'll want to own for the long run
Among healthcare stocks, I view two as no-brainer buys during the coronavirus pandemic. Meanwhile, there's one popular healthcare stock I'd strongly advise investors avoid.
The first no-brainer buy is surgical-assisted robotics developer Intuitive Surgical (ISRG -1.28%). Not only do I view it as my single best investment idea for April, but it might be the most surefire investment of all publicly traded companies.
What makes Intuitive Surgical so special is the company's razor-and-blame business model. The company's da Vinci surgical systems, while pricey at $0.5 million to $2.5 million each, don't generate very robust margins. That's because these intricate machines are costly to build. Where Intuitive Surgical tends to make the majority of its profit is from selling instruments with each procedure, as well as in regularly servicing its installed da Vinci systems. Instrument sales and service revenue produce considerably higher margins than system sales. Over time, these higher-margin segments have grown into a larger percentage of total sales, meaning Intuitive Surgical's operating margins are only going to improve.
It's just as important to realize that Intuitive Surgical has no serious competitors. This is a company that ended 2019 with 5,582 installed da Vinci systems. You could add up all of its peers and you wouldn't even come close to Intuitive Surgical's installed base. Given the price of these systems and the training that's given to surgeons, there's virtually no concern about client churn.
Also, the da Vinci system still has a long runway to pick up surgical market share. Already dominant in urology and gynecology surgeries, the da Vinci surgical system has plenty of opportunity to become the go-to operating platform for thoracic and colorectal surgeries.
Investors can expect double-digit growth potential from Intuitive Surgical for many years to come.
Though Livongo's suite of solutions target a variety of indications, including obesity and hypertension, the bulk of the company's business is expected to derive from helping diabetics live healthier lives. The most recent statistics from the Centers for Disease Control and Prevention show that there are 34.2 million diabetics in the U.S. (about 10.5% of the population), with another 88 million people showing systems of prediabetes. Without a change in lifestyle habits, these 88 million are on track to join the 34.2 million living with diabetes over time.
Perhaps the biggest challenge for diabetics is staying on top of their disease. This is where Livongo's suite of solutions comes into play. Using artificial intelligence and a growing mountain of data as the catalyst, Livongo is able to incite behavioral changes in diabetics that result in fewer complications and healthier people. Not only does it sound conceptually great, but the member and sales data shows it works.
Last week, Livongo Health preannounced first-quarter revenue of approximately $66.5 million, which is well ahead of its previous guidance of $60 million to $62 million and represents a more-than-doubling in year-on-year sales. This shouldn't be too surprising, as total patient count had nearly doubled from the previous year to 222,700 when Livongo reported its fourth-quarter operating results in March.
With Livongo Health nearing recurring profitability and just scratching the surface on its potential patient pool, it looks to be a must-own healthcare stock.
Here's the healthcare stock you'll want to avoid
At the other end of the spectrum is a healthcare company that's a stone's throw away from an all-time high and looks to be more than fully valued: Eli Lilly (LLY 0.01%).
There's no question that certain things have gone right for pharmaceutical giant Eli Lilly in recent years. For one, it remains a major player in the diabetes space, with type 2 diabetes therapies Trulicity and Jardiance delivering year-on-year sales growth of 29% and 43%, respectively, in 2019. On a combined basis, Trulicity and Jardiance accounted for more than $5 billion of Eli Lilly's $22.3 billion in sales last year.
Taltz, Eli Lilly's treatment for moderate-to-severe plaque psoriasis, has been another saving grace. Sales were up 46% last year to nearly $1.4 billion.
So, why avoid Eli Lilly if everything looks great with these three fast-growing therapies? For one, it has numerous high-profile drugs now off-patent or losing their luster because of weak pricing power and increased competition. For instance, erectile dysfunction drug Cialis saw sales fall more than 50% in 2019 due to generic competition, while revenue for longtime top-seller Humalog dipped 6% on weaker demand and lower prices. With these challenging situations added in, Eli Lilly's sales growth in 2019 came in at a more pedestrian 4%.
Eli Lilly has also had zero luck with its Alzheimer's program. This isn't to say that the success rate for clinical-stage Alzheimer's drugs is high, because it's not. But Lilly's numerous investments in treatments targeting beta-amyloid plaques have yielded no tangibly positive results.
Finally, there's Eli Lilly's valuation. For a company growing sales in the mid-single-digits, I certainly don't expect to pay 19 times next year's consensus earnings or 27 times current cash flow. Both figures are nearly highs for the past decade. Do yourself a favor and avoid Eli Lilly in favor of just about any other Big Pharma stock.