COVID-19 shocked the stock market in 2020, causing massive disruptions in the world economy and killing a lot of innocent people. While major healthcare companies responded to this threat, the stocks that soared were tiny biotech companies, names like Novavax (NASDAQ:NVAX)Vaxart (NASDAQ:VXRT) and Co-Diagnostics (NASDAQ:CODX). Those micro-caps saw dramatic increases of 1,000% or more in a matter of months. Will these stocks continue to run higher in 2021?  

Healthcare bureau chief Corinne Cardina and Fool contributor Taylor Carmichael discuss the healthcare stocks with the five strongest returns in 2020. This segment was recorded on Jan 15, 2021.

Corinne Cardina: Hey there, Fools. Happy Friday, everybody. I am Corinne Cardina, bureau chief of healthcare and cannabis on fool.com. We are going to spend the next hour talking about healthcare stocks, so we're going to start. The first 30 minutes, we're going to talk about the top-five healthcare stocks that performed the best in 2020, talk about what their prospects are for 2021. Then the second half hour we're going to have a different contractor on. We'll be talking about medical device stocks. We'll have plenty of time for questions, so go ahead and open up Slido. Our code is MF Live. Submit your questions there, up-vote other people's questions, and we will try to get those answered for you. We're just waiting for my first guest, a Fool contractor having a couple of technical difficulties. Go ahead and think about what questions you want to hear us answer on healthcare stocks. We'll be talking specifically too much about COVID stuff today, but a couple of those top-performing stocks of 2020 are of course involved in some COVID vaccines and diagnostics, not surprisingly. Just a reminder in case you're just joining us, we have a different Motley Fool Live schedule for next week, so no Motley Fool Live on Monday. The markets are closed for Martin Luther King Junior day. Tuesday will be regular schedule. Wednesday, we will have the morning show, but the rest of the day will be best of replace. You can still tune in, but we won't be live because it's president-elect Joe Biden's inauguration. I see my guest, Taylor. Taylor, can you make sure your video is on? Any minute, hang with us. Here we go. Any minute. There we go. Hi, Taylor. How are you?

Taylor Carmichael: Hey, Corinne. I'm sorry about that technical glitch.

Corinne Cardina: It's OK. Everyone, this is Taylor Carmichael. It is his first time on Fool Live, so let's give him a warm welcome. Taylor we'll try not to make it too hard on you so you come back. How are you today?

Taylor Carmichael: Thank you. That was scary. They kicked me off completely and then I got back in.

Corinne Cardina: That's Zoom for you. Always throwing a curveball and things. I'll just restart us. We've got Taylor Carmichael. He's a fool.com writer who covers the healthcare space.

Taylor and I are going to start with the top five healthcare stocks of 2020. We're going to talk about what their prospects are for 2021. We're going to go over all five, discuss which ones are buys, and we're ultimately going to pick which one we think is the best buy for this year. Then stay tuned for the second half-hour. Brian Feroldi is going to hop on with me and we will be talking about some compelling medical device stocks and take your questions.

Taylor, when we pulled the data for the top five healthcare stocks of 2020, we used a couple of screening criteria that I think folks should know about in case they're like, "Wait, what about this stock?" We made sure to only pull market caps above $200 million, which is our requirement for fool.com stocks. We want to make sure we're not having an impact on the market when we give our analysis so we don't want it to be too small. Market cap above $200 million; it has to be trading on a major stock exchange.

But that said, we took a look at the whole market and we're going to talk about the five that did the best for investors, that is in the healthcare space. A lot of the ones we're going to talk about they're still pretty small. The law of small numbers means it's harder for a large-cap stock, even a mega-cap stock like Johnson & Johnson, to increase in size by these kind of factors than we can see with small-caps. We're going to look into some of the reasons behind these strong performances. We'll talk about whether the stocks could have a similarly strong 2021, but let's jump in.

The No. 5, and we're going to go from 5, 4, 3, 2, 1, just to keep everyone in anticipation of that No. 1 stock. No. 5 was Co-Diagnostics. I will put that in the chat. This is a company focused on molecular diagnostics. It was one of the first to develop a COVID-19 test at the start of the year, selling more than 10 million test kits globally by December. Co-Diagnostics specializes in molecular diagnostics, which is high end, more expensive, and very precise. It can take days to get the results back from the lab. It competes with Fulgent Genetics in this space and other larger diagnostic companies offer antigen diagnostics, which are like nasal swabs, and you get those results right away. It's a little bit different. Doesn't work as well. There's nasal swabs when people are asymptomatic, but Co-Diagnostics, looking at 2020, it's up 938%. It is still only a $283 million market cap, so there could be some room for growth in this next year.

I'm going to step off my soapbox and let Taylor tell us a little bit more about this stock, starting with, what is one green flag for 2021? Something that bodes well for Co-Diagnostics in 2021.

Taylor Carmichael: Right. Great. Well, Co-Diagnostics is a COVID-19 stock. It jumped up when COVID-19 hit. It jumped up in March; it jumped up early. They had a diagnostic test for COVID-19. It came out of nowhere. This was a micro-cap company, very tiny company, and now it's still a small company, $283 million. That shows how small it was. It's basically a ten-bagger in less than a year. It jumped so highly because of COVID-19. It's very much a COVID-19 stock, and we're jumping ahead to the red flag, but that's what's scaring people from the stock, too, is the fear that once COVID-19 goes away, that the stock will crash or come back down to where it was before, because so much of their revenues are COVID-19 related right now.

They have very high-end diagnostics for things like Zika and hepatitis, hepatitis B, hepatitis C, things that really aren't a big issue in the United States or in Europe. COVID-19 was, I don't want to say a blessing, but it really helped this company because it gave them a market for their high-end diagnostics, and they hit the ball running, and they've got incredible numbers. I mean, they have profit margins like Visa and their growth rate is like 50,000% or something. Their growth rate is from next to nothing to fairly substantial. Not substantially. I can't remember what their revenues are, but the 52,000% revenue growth. But that's basically because it was such a small company before.

I guess the green flag, I would say is if you think COVID-19 is a new normal, and you think that we're going to have to need diagnostic testing over the next several years, then this would be a great stock to buy because they have a diagnostic that distinguishes COVID-19 from the flu, from the cold, which a lot of the symptoms are synonymous. If you have a fever, maybe you have the flu or maybe you have COVID-19. You have a hacking cough, maybe you have a cough, maybe you have the common cold, or maybe you have COVID-19. They have a diagnostic that will distinguish that and if you are to believe that this is a new normal, and we're going to be fighting COVID-19 for a long time, this would be a great stock to buy, and Fulgent Genetics (NASDAQ:FLGT) would be a great stock to buy, too.

They're very similar companies, I think. That's a Fool recommendation, actually. Fulgent Genomics. This is a smaller version, not much smaller, but they are very similar companies, and they have the same phenomenon. They both have a high short interest. They have 23% short interest, 26% short interest, which to my way of thinking that's the market saying, we're going to solve COVID-19, and the vaccines we're going to vaccinate people, and this is going to go well.

It depends on how you come down on that. If you believe that we're going to vaccinate, if you're the optimist, you believe we're going to vaccinate, and COVID-19 is going to go away, I would avoid this stock. Because so much of their revenues are COVID-19 related, but if you think it's a new normal, sorry about my dog. If you think it's a new normal, then this is a great stock to buy. It's very cheap, which is the high short interest. Their P/E is low, their profit margins are like Visa and their growth is exceptional, and that's because we're in the middle of a pandemic and people want to know, "Do I have COVID-19?"

Corinne Cardina: Excellent.

Taylor Carmichael: If it's going to be this way for the next several years, this is a good stock for you.

Corinne Cardina: Yeah. We've heard a lot about new mutations causing new variants to circulate in all different parts of the world. Could some of these new mutations with the virus stave the demand falling off for diagnostics? What do you think about that?

Taylor Carmichael: Yeah. I do think that that is a vaccine question, because that's what the mutations are talking about. If we vaccinate, and the vaccination in Moderna (NASDAQ:MRNA) and Pfizer (NYSE:PFE) is 95%, very high efficacy rates. If we vaccinate and we no longer have to worry COVID-19, then that is great for our society but would not be good for the stock. But if COVID-19 mutates, then we're going to have to revaccinate every year like we do with the flu. We're going to revaccinate, and we're going to need diagnostics. It depends on how much mutation there is. If it mutates and mutates and mutates, then in essence, this COVID-19 is going to stay with us. Then we're going to very much need diagnostics and we're going to have to revaccinate. But if it's a one-and-done vaccination, and that's something we don't know yet, so that's the big question really, is, and if I was investor in Co-Diagnostics, I would pay attention to the vaccines, actually. Is it one and done? Are we seeing COVID-19 disappear, because that's key for this stock right now.

Corinne Cardina: Definitely. Let's move on to No. 4. This is Trillium Therapeutics (NASDAQ:TRIL). This is a small-cap biotech with a novel but still unproven immuno-oncology platform. Into 2020, it was up 1,330%. It is at a $1.4 billion market cap. Taylor, tell us about Trillium. What kind of business does it have? This is not a COVID-19 stock, right?

Taylor Carmichael: It's not. This is a cancer stock, but similar to Co-Diagnostics, it started off the year as a tiny micro-cap. This is another micro-cap, it came out of nowhere. That's when you see a 1,300% run in a year. What they have is they're in an area that's very exciting. They're focusing in the oncology space, and this is a cancer biotech company, and they are focused on the CD47 protein.

Now, the CD47 protein, the way to think about it, it's like a cloaking device. The CD47 protein hides cancer cells from your body's immune system. Because your body has a natural immune system and an adaptive immune system that kills cancer. But CD47, when it's not functioning, it hides, it cloaks the cancer and keeps your body's immune system from killing the cancer. What biotech companies are doing in the CD47 space, they're turning off CD47, this protein, so that all of a sudden, your body's immune system can see the cancer and kill it. This is a very exciting space. That Gilead (NASDAQ:GILD) paid $4.9 billion to acquire Forty-Seven, which is another biotech company focused on the CD47 protein. Well, that's what Trillium does. They're focused on the CD47 protein; they want to make cancer visible to your body's immune system so that your body will naturally kill the cancer.

One of the things that made the stock jump up is that Pfizer basically validated their science a bit by investing $25 million in the company. They just basically bought $25 million worth of stock. Pfizer knows more about cancer drugs than I do. If Pfizer is willing to invest $25 million in this company, then that work, to me, it's valid. That's something I would like to see in a small unprofitable biotech like Trillium, if they have collaboration with big pharma, which is what they have here. They have Pfizer, they're making this investment, and they have not given up any of their intellectual property rights in their drugs. It's not like Pfizer bought their drugs or have any rights in the drugs. That's a real bonus too, so they have a lot of cash. They have $290, almost $300 million in cash, and they only burned about $22 million in cash.

This is a company that is in a financially very strong position and they have very good science, but I guess the red flag, which one jumped ahead a little bit, the red flag very, very early. They're in the middle of phase 1. You're several years away from revenues, from profits, you're several years away from having any drugs. Even if they race it, it's not going to be like COVID-19; it's not going to be in a year. So this is several years away when you're phase 1. At a $1.4 billion market cap, that's on the high end for a company that has drugs in the phase 1. I guess my one warning here is the market loves the deal with Pfizer and loves the science. Pretty excited. It's pretty expensive for where they are, and you may be able to get a cheaper price down the road.

Corinne Cardina: Right. In 2021, they are going to give some key updates on two of their phase 1 trials. Those could be potential catalysts that are looming, or if it doesn't turn out positive, it could certainly send shares coming down in a hurry. We will keep an eye on that one.

Let's move to No. 3, Cardiff Oncology (NASDAQ:CRDF). In 2017, it licensed its lead candidate from a private company for just $2 million after that candidate flopped a phase 1 study. In September, it reported better than expected interim results for advanced stage colon cancer patients. Those patients had a particular mutation called KRAS, meaning it's more aggressive than usual. Investors are looking at this experimental drug as a potential blockbuster. Stock was up 1,350% in 2020. The market cap is still only $625 million. Taylor, what is your green flag and then your red flag for Cardiff Oncology?

Taylor Carmichael: Well, the green flag, I guess, for Cardiff is that they're going after KRAS mutation, which is a very big field, and that mutation causes cancer that's basically undruggable. The market is very excited. That's why Cardiff has jumped up so much because they are doing this one test, they only have one drug, but they're doing this, they're looking at it and using it with other drugs. It's not a monotherapy, using combination with other drugs. They are looking at it in KRAS.

Now, KRAS mutation has been huge. If you look at Mirati, they've gone up to an $11 billion market cap because they specialize in KRAS. Amgen also is in this area. Demand is huge for this. So that would be the green flag, is that where they're going after is the high demand area and if they can pull it off, the sky is the limit. A couple of downsides, one, they only have one drug which they acquired from another company. It's cancer, so in this particular trial, there are a fair number of adverse events: anemia, fatigue, low levels of blood platelets. In one study, there were 24 people tested with the drug over a six-week period, only 14 people completed the study. So that's a lot of dropouts; that's 10 people dropping out because of adverse events or the cancer got worse.

That's a negative; cancer's tough. It's just really hard and a lot of brilliant minds have been trying to solve cancer for a long, long time. It's not a lock, and like Trillium, this is very early. They are a little more advanced than Trillium, they're in phase 2, and they're going to have data readouts this year in phase 2 and phase 1. They are farther down the road than Trillium, but you'll notice their market cap is not as high, and I take that to mean the market is not quite as excited about Cardiff probably because they only have the one drug. Most exciting is that they're going after KRAS, but I'm not convinced that this is a world-beater drug yet, and it's very early. So I would probably not buy the stock, but I would keep it on a watch list, and I would keep Trillium on a watch list too, and these are very interesting companies.

Corinne Cardina: Financially, do you think Cardiff, can it stay solvent or does it need a partner at some point to get to regulatory submission and potential commercialization?

Taylor Carmichael: Yeah, that's a good question. They don't have a lot of cash. They started off with $10 million and they burned $11 million in cash. Again, started off as a micro-cap, when they started off. They've had a huge run-up in the stock, and they sold stock earlier in the year over ... raised some money. So now they have to have more money than they started off the year with. Overall, they have $36 million in cash now. They raised money in the year, so effectively, they didn't burn anything. They've got more money than they had before.

But the downside, they got it by selling stock, so investors should be a little worried about dilution, about them having to do that again, coming back to the market for more money, selling more stock, that's always bad. You like your companies to buy your stock back, you don't like them to sell stock. So when they sell stock, your stock's going down. Unlike Trillium, they don't have a big pharma partner, they don't have a collaboration deal yet. To my way of thinking, a watch list stock, I don't think I would be ready to invest here yet. It's still very early.

Corinne Cardina: Awesome. No. 2, Vaxart. I think this is one that people have become familiar with that emerged from obscurity because of the pandemic. Its investigational product is an oral COVID 19 vaccine in a tablet form. Had pretty strong pre-clinical results. It's enrolled participants in the phase 1 trial up 15%, 30% in 2020, almost $700 million market cap. Taylor, really quickly because we only have a couple of more minutes here. What is a green flag and a red flag? What do we think about Vaxart?

Taylor Carmichael: Well, the green flag for Vaxart is they're doing an oral pill for vaccination for COVID 19, and if it works, sky's the limit, it's going to be an amazing stock because oral pills are just better than shots. That's the green flag.

There are a lot of red flags for Vaxart. I've become more bearish since I've done more research into Vaxart. Six months ago, they did a primate study. Operation Warp Speed, OWS, asked them to get some drugs to do a primate study. So they did a primate study six months ago, and we haven't heard anything about that study. Operation Warp Speed hasn't given them any money, hasn't pre-ordered any pills or done anything which they've done for a lot of these other vaccine companies. They haven't done any of that with Vaxart, so my suspicion would be that that primate study was disappointing.

Now Vaxart's talking about their hamster data and I'm like, what happened with the primate study? Primates are closer to us than mice or hamsters. And we don't know; they haven't said anything. That would be my concern about that.

The company is also being investigated by the SEC and the U.S. Attorney's Office in California for hyping their relationship with OWS six months ago. That would be another concern. I have a few concerns about Vaxart. They are in the middle of their phase 1 trial in people, so if they have positive data there, the upside is very high. But I would be concerned about that animal study that we've never seen data and it's six months later.

Corinne Cardina: Absolutely. Thank you, Taylor. Let's talk about No. 1. So No. 1, to nobody's surprise, is Novavax. This is the largest company of the five, probably the most proven. It already had positive phase 3 results for its flu vaccine candidate called NanoFlu. It was shown to be superior to Sanofi's that is on the market. Those results came out in the spring, so definitely contributed to its run-up in 2020. It got $1.6 billion from the U.S. government to develop its COVID-19 vaccine candidate. The stock is up 2,700% in 2020, it is almost to an $8 billion market cap. Taylor, what is one green flag and one red flag for Novavax?

Taylor Carmichael: The green flag for Novavax, it's a COVID-19 stock last year. The flu vaccine helped them. But mostly I feel like it's the expectations for COVID-19 because to vaccinate successfully would be huge. There are distribution issues with vaccines that are on the market now, with Pfizer's drug and with Moderna's drug because they require the drugs to be frozen, to be kept very cold. Novavax, potentially, if the drug is approved or they get emergency use authorization, they could take a lot of market share. That has always been a bullish case that Novavax is still the smallest company among the top-tier vaccine candidates, and they have as good a shot as anybody.

We're waiting on phase 3 data from the UK. If they get positive data, get like Moderna, Pfizer, over 90%. It's already had a huge run-up, and it's not going to do another 2,700% in 2021. But I'm always happy when I get a double or a triple or a quadruple. The potential is there for significant gains, but we don't have the data yet. We're waiting and it will happen this quarter in January, February, March. It's going to happen. They're going to give us the data from a phase 2 test in South Africa and Australia, and a phase 3 test in the UK.

Particularly the phase 3 one in the UK is critical for Novavax because, with that, you can probably get a EUA in the United States. Certainly, you would get approval in Europe and the rest of the world, and they have a lot of distribution agreements in place. So it's all hinging on that phase 3 trial.

It's very risky in the short term if they have bad news, it'll get hit hard, but the upside is substantial. I would argue also in the long term that Novavax is a strong buy because they do have a flu vaccine, and they do have a good program, even if they have short-term disappointment. So I think it's still a good stock to buy.

Corinne Cardina: Absolutely. So even though they do have the flu vaccine, it's acting a little bit like a binary biotech at the moment. We're waiting on that data. They've said they could combine COVID 19 and flu vaccine. But obviously, if the COVID-19 vaccine data doesn't look good, that evaporates as well.

We have two minutes left. Let me quickly ask you which you think is the best buy going into 2021, while we're here. In 2021, for the year and beyond, which one is the best?

Taylor Carmichael: I would say Novavax and just knock on wood. I hope I don't jinx it. This is the largest of the companies on the list, but they are also in a very strong position in terms of finances, they are strong in terms of their science. I'm just a big believer in Novavax, so that would be my top take out of this group.

Corinne Cardina: Excellent. Can I ask you, what is one takeaway for investors who are thinking about buying healthcare stocks in 2021?

Taylor Carmichael: I would say, do your own research always and look for companies in phase 3 trials. We have phase 3 trials upcoming. We have big pharma partners. We have a lot of cash, and be prepared for ups and downs. When you get a winner, don't sell it, just hold on to that sucker. Just keep riding it, and you'll do really well.

Corinne Cardina: Absolutely. Well, thank so much, Taylor. You did a great job your first time on Fool Live. I appreciate all your insights. This has been really valuable.

Taylor Carmichael: Thank you, Corinne. I enjoyed it. I enjoyed it.

Corinne Cardina: All right. Have a great weekend.

Taylor Carmichael: You too. Bye-bye.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.