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3 Top Healthcare Stocks to Buy Right Now

By Jason Hawthorne - Updated Apr 15, 2021 at 2:52PM

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Some healthcare companies are a good value even with the stock market at all-time highs.

Veeva Systems (VEEV 3.06%), Cerner (CERN), and Merck (MRK 1.37%) offer investors different reasons to buy their stocks. Depending on where you are in your investing journey and your tolerance for risk, one may look more attractive than the others. There is no wrong answer.

The best stock is one that you're comfortable holding for the long term, avoiding emotional decisions when the market is volatile. For investors looking for strong companies and reasonable valuations in the healthcare sector, one of these could be the best addition to your portfolio right now.

A finger pressing a button on a keyboard that reads "Buy Now"

Image source: Getty Images.

1. Veeva Systems

Veeva provides cloud solutions for the global life sciences industry. The company was founded on the idea that software built to solve the problems of only one industry could lead to a better product. As an example, the company's new clinical network application is connecting patients, sponsors, and sites for clinical trials. The goal is to make the historically expensive and time-consuming process 25% faster and 25% less expensive. 

Its growth and profitability have been impressive. Since fiscal 2017, customer count, revenue, and operating cash flow have all climbed significantly. The numbers also show the hallmark of a great business. Each customer is spending more every year, and the company is converting more of that spend into cash flow. For 2020, revenue retention -- what customers from 2019 spent in 2020 -- was 124%.

Metric FY 2021 FY 2017 Growth
Customers 993 400 148%
Revenue $1.465 billion $409 million 258%
Operating cash flow $551 million $80 million 589%

Data source: Veeva Systems

Management is guiding for $1.76 billion in sales this year, a 20% increase. In recent years, the company has branched out beyond life sciences into cosmetics and chemicals. This has opened up a new market for growth, and the company is rewarding shareholders. Before the pandemic, Veeva traded around 50 times operating cash flow. These days, the stock trades around 75 times cash flow. With continued growth on the horizon, superb financial performance, and forays into new markets, investors shouldn't wait for the stock to sell off. As long as the outstanding performance continues, Veeva shares are likely to continue climbing.

2. Cerner

Cerner offers an electronic health records (EHR) platform that stores patient data and is used by healthcare personnel including nurses, doctors, and pharmacists, as well as consumers. Although its chief rival, Epic, has been taking share in hospital systems, the company still sits in a strong second place with 26% of the acute-care market. The business of EHRs isn't growing too quickly, but Cerner has increased sales and cash flow steadily.

Since 2016, revenue and operating cash flow have grown 15% and 24%, respectively. That's even after the top line fell slightly in 2020 to $5.5 billion due to the pandemic. In 2019, the company began paying a dividend and increased the payout 22% last year. It now pays shareholders $0.22 per quarter, a yield of 1.2%.

In another sign that the business is maturing, Cerner has spent the past few years trying to simplify its products and operations. On the latest earnings call, it announced it has realized $300 million in annualized cost savings. The company has also overhauled its C-suite. While Brent Shafer took the helm in February 2018, C-level executives in finance, strategy, technology, and client services have all been in their roles for less than a year. 

Cerner's position in the market is reflected in its stable stock and valuation. Over the past few years, the company has traded reliably between 3.5 and 4.5 times sales. It sits in the middle of that range currently, but management has guided for $5.75 billion to $5.95 billion in revenue this year. If the forecast holds up, the price-to-sales ratio will be 3.8 using the 2021 midpoint.

It isn't a company that gets a lot of buzz, but a fairly priced stock with a strong position in an industry that has to buy the product makes shares of Cerner compelling. Add in a new dividend that management has already raised significantly, and it's not hard to imagine that the stock will outperform the market if investors start getting a little pickier about what they own.

3. Merck

Merck is a well-known blue chip pharmaceutical company with a track record of giving back to shareholders. Its juicy 3.4% dividend yield is a reason many conservative investors buy shares. It's not for the growth. Although 2020 revenue was roughly the same as in 2011, the stock price has more than doubled over the past decade. That's thanks in large part to management's focus on buying back shares. In fact, the number of outstanding shares have been reduced from 3.1 billion to 2.5 billion over the 10-year period. That means even if the company was worth the same as it was in 2011, each share would have been worth 18% more. Last year Merck was able to grow sales 2.5% year over year.

The company's shining star has been Keytruda, the drug that helps the immune system kill a type of cancer cells. The drug has been approved for treating a long list of cancers, including breast, skin, lung, and colorectal. It alone accounted for 30% of Merck's $14.4 billion in revenue last year, which coincidentally grew 30% from 2019.

The company also boasts a successful human papillomavirus (HPV) vaccine and anti-diabetes medication that account for roughly $4 billion and $5 billion, respectively. Another top sales driver is Merck's animal health unit. It brought in $4.7 billion last year. Although sales have been declining since at least 2018, Merck's women's health business brought in $6.5 billion in 2020. Management recently announced the unit would be spun off into a new company called Organon, focusing on fertility and biosimilars.

The split could boost how the market values the company's sales. Over the last few years, the stock has typically traded between four and five times sales. It's currently sitting at the bottom of that range despite announcing the spinoff, a recent partnership with Gilead Sciences (GILD 0.89%) to fight HIV, and an agreement to produce vaccine doses for Johnson & Johnson (JNJ 1.13%). For investors seeking a stable healthcare stock with a good dividend, the time could be right to scoop up shares of Merck.

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
$92.42 (1.37%) $1.25
Johnson & Johnson Stock Quote
Johnson & Johnson
$179.52 (1.13%) $2.01
Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.36 (0.89%) $0.55
Cerner Corporation Stock Quote
Cerner Corporation
Veeva Systems Inc. Stock Quote
Veeva Systems Inc.
$204.11 (3.06%) $6.07

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

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