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Buy These 3 Breakout Healthcare Stocks if There's a Sell-Off or Correction

By Alex Carchidi - Apr 3, 2021 at 6:40AM

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I've been waiting to buy these stocks at a better price. Now might just be the time.

Seeing a wall of red numbers on your brokerage account is usually a frightening experience, but it doesn't necessarily mean that you're a bad investor. Market corrections are a fact of life, and nearly everyone's portfolio is affected by them. In my view, one of the things that separates skilled investors from the less-skilled is their reaction to a sell-off. And right now, the market might be in the midst of a sell-off in some sectors.

Some people might panic, while others will view it as an opportunity to buy stocks they've been eyeing. In this vein, I've been watching a group of three healthcare stocks that are currently on the pricey side. All three flourished in the chaos of 2020, and all three are likely to be supported by long-term trends in the economy moving forward. But, two of the three are down for the year thus far, meaning that they might be approaching buy points. If the market takes a tumble, buying stock in any of the trio could be a great move.

Male doctor talks with a mature male patients over video chat while reviewing material from medical scans.

Image source: Getty Images

1. STAAR Surgical

You've heard of eyeglasses and contacts (and you might even be wearing a pair right now), but did you know that there are corrective lenses that can be placed inside your eye? STAAR Surgical Company (STAA -2.96%) makes exactly that: implantable lenses for ocular surgery. And business is booming. In the fourth quarter, it reported net sales had risen 18% year over year. Likewise, its gross margin grew by a couple of percentage points to reach 74.6% in 2020, and its future is just as bright. The company expects its total addressable market (TAM) to nearly double from 35 million people representing $6 billion in sales to 70 million people over the next 30 years, and it's already positioned to keep capturing a hearty share of that growth. 

So, why should investors wait for a sell-off before buying? In short, because the stock may be extremely overvalued on the basis of its price-to-earnings (P/E) ratio. STAAR's trailing P/E ratio is just over 820, which is more than twice the average of 317 for the healthcare products industry. The ratio doesn't necessarily need to fall to the level of the average for the stock to be a good deal, but even a small step downward could make it a more attractive buy.

2. Abiomed

Abiomed's (ABMD -6.88%) heart pumps for cardiac surgery fill a key niche in the surgical tools market, and they also help patients to recover faster from serious interventions. Treatment using Abiomed's pump can save 80% of people suffering heart attacks, which is a massive improvement compared to the 50% survival rate without it. Similarly, while the stock (hopefully) won't be the only thing keeping your portfolio in good health, it could give it much-needed support for recovery or growth. In 2020, the company's total revenue rose by 9% to reach $841 million. Abiomed's operating income and cash holdings are increasing steadily year over year, as more and more clinics are certified to use its pumps in the U.S. And, with $651 million in cash, it has plenty of gas in the tank to keep growth going by developing new pumps and other life-saving cardiac interventions.

Despite its somewhat weak latest earnings report and a muted reaction from the market, I still believe the stock is more on the expensive side. Quarterly earnings growth shrunk by 10.6% year over year, which was driven by a rising cost of revenue and also higher selling expenses. But Abiomed is still priced like a rapid growth stock. Its trailing price-to-sales (P/S) ratio is around 17, which is much higher than its industry's average of 6.94. It'll likely return to steady earnings increases sometime this year, meaning that in the event of a market crash, the stock will be at a discount.

3. Teladoc

After the pandemic forced people to stay at home, Teladoc Health (TDOC -6.03%) became a household name thanks to its easy-to-use and broadly accessible telehealth services. The company sells memberships to insurance companies, granting their customers access to its telehealth doctors. Its paid membership base -- a strong correlate for its recurring income -- grew by 41% in the U.S. during 2020, reaching 51.8 million subscribers. That was certainly a factor in helping its yearly total revenue nearly double to $1.09 billion in the same period.

But I think Teladoc is still a bit overpriced. It currently trades at a forward P/S ratio of 14, largely as a result of its meteoric growth last year. The stock will face headwinds in the short term as investors cycle their funds from tech-heavy growth stocks to commodities and other sectors. Teladoc isn't profitable, and management doesn't expect to grow its memberships or its revenue as quickly in 2021. Both of those items are issues in the context of a flight-to-value, if one is occurring. As the pandemic starts to subside, people will be more willing to go to in-person visits with their physicians, potentially reducing the demand for telehealth. Nonetheless, in the long term, its superior level of convenience means that telehealth is here to stay, and Teladoc made such significant inroads last year that it's hard to see their brand power dropping anytime soon. So, I'll be looking to snap up some shares if there's a correction that leaves it at a (relative) discount to where it is today.

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Stocks Mentioned

ABIOMED, Inc. Stock Quote
ABIOMED, Inc.
ABMD
$240.46 (-6.88%) $-17.77
STAAR Surgical Company Stock Quote
STAAR Surgical Company
STAA
$56.70 (-2.96%) $-1.73
Teladoc Health, Inc. Stock Quote
Teladoc Health, Inc.
TDOC
$30.87 (-6.03%) $-1.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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