One of the most fundamental skills in investing is thinking for yourself and developing your own thesis about why a stock is worth your money. And sometimes, getting the returns you want means going off the beaten path to invest in companies that other people might be skeptical about or unaware of.
On that note, the best healthcare stocks for long-term investing have one thing in common, no matter how obscure they might be to the public: Their business models never go out of style, and they probably never will. None of the three stocks I'll be analyzing are traditional growth stocks, and certainly they're a bit expensive to be considered "value" picks. But they each match revenue growth with a no-innovation-needed approach, making them excellent options for investors looking to build their long-term wealth.
1. Molina Healthcare
Molina Healthcare (MOH -0.77%) is an insurance provider that specializes in the low-income segment of the market. Molina's largest customer segment is Medicaid, which accounts for 78% of its revenue. The next-largest segment is Medicare, with a 14% share. That means as long as the government is good for the cash, the company won't have any problems with customer attrition stemming from business or economic cycles, so its profit margin can be preserved over time. Its after-tax margin in 2020 was 3.5% -- slim, but hardly under much pressure from the pandemic. Molina's margin last year was only 0.9% lower than its value in 2019, and several percentage points higher than in 2016 or 2017.
Its long-term strategy is to continue to expand into new state markets in the U.S., increasing its membership along the way. So far, it hasn't had much trouble expanding its subscriber base by hundreds of thousands of people per year. Nor has it struggled to find targets for fruitful acquisitions in new areas to establish its presence, like it did in Massachusetts, Arizona, and Virginia in 2020. Dealing with government-subsidized care programs has another advantage: State-level Medicaid agreements span periods of three to five years, which means that it's easy for Molina to lock in medium-term revenue.
Finally, even if the U.S. undergoes sweeping healthcare reform, the fact that Molina's largest customers are likely to see massive increases in demand from such reforms sweetens the pot, especially in the context of a long-term investment.
2. Align Technology
Investing in a dental product company like Align Technology (ALGN 3.11%) might seem odd. After all, there's not a massive and growing market for tooth straightening devices, right? As it turns out, as many as 500 million people worldwide are eligible to use Align's invisible straighteners. The company's efforts so far have only reached a fraction of this market, but that's more than enough to keep growing its trailing revenue of $2.47 billion, even during a chaotic year like 2020.
The long-term proposition for this stock is that people are always going to be interested in cosmetic dental procedures like tooth straightening. Importantly, Align has already been a success in that space for decades, and its operating margin is still increasing, with a fourth-quarter rise of 2.3% on a year-over-year basis, reaching 25.5%. Its latest reported quarterly revenue growth was even more impressive, with a 28.4% year-over-year jump. Moving forward, the company plans to expand its international marketing operations so that it can continue to ship more cases of its aligners and get more orthodontists on board with prescribing them. With no similarly sized competition in sight, it's hard to see how Align could stumble.
3. STAAR Surgical
Much like Align Technology, STAAR Surgical Company (STAA 5.20%) makes a seemingly niche healthcare product that is actually a goldmine. STAAR's refractive implantable lenses are great for people who need to have their vision corrected but don't like the aesthetics of glasses or the occasional discomfort of contacts. And, because an increasing number of people are going to need vision correction over time -- blame hours spent staring at computer screens -- the company is expecting the myopia market to nearly double by 2050.
STAAR is the fastest-growing company in its industry, and last year it expanded its revenue by 9% even while its competitors reported a 21% decline in the number of lens implantation procedures. Furthermore, even as implantation procedures and supply chains faced new challenges in the context of the pandemic, its gross margin rose in the fourth quarter to reach 74.6%, which is half a percentage point higher than the same time in 2019. In other words, STAAR is becoming more efficient and more entrenched in its market even while competitors are faltering amid the prevailing conditions. If that's not a positive sign for its long-term appeal, not much else is.