This Sector is 13% of the Stock Market and Has Lifelong Potential

The healthcare sector features everything from established blue chips to early stage biotech companies. In this clip from "The Rank" on Motley Fool Live, recorded on Jan. 31, Fool.com contributors Jason Hall, Dan Caplinger, and Matthew Frankel, CFP®, share some of their favorite healthcare stocks and what they expect to see from the sector in 2022.

Matt Frankel: Coming in at, or we'll call this No. 7 for purposes of the show, this is healthcare. Healthcare is pretty self-explanatory in a sense, but not in the way that it has a broad array of companies. This includes everything from big healthcare equipment producers and life science companies like Johnson & Johnson, for example, all the way down to little biotech start-ups are in the healthcare sector. As a whole, we all ranked the healthcare sector, surprise, surprise, pretty similar toward the middle of the pack. We'll start with Dan on this one. Dan, what are your thoughts on the healthcare sector? Now that we're getting toward the top half, I might ask you to give a favorite or two. But what are your general thoughts on healthcare these days?

Dan Caplinger: I put it six, so it wasn't. Yeah, it was. It's right in the middle for me, and that's because I see it being a middle-of-the-road performance. As you pointed out, there's pretty wide breadth in terms of what you get in healthcare. You get, I think, the quintessential Johnson & Johnson being the trifecta of consumer healthcare products, pharmaceuticals, and medical devices and medical equipment. You get exposure to all of those things. Then as you pointed out, going to the higher-growth, higher-risk biotech and clinical-stage biopharma type companies. Any ETF is going to hedge toward those big companies that have established businesses, are pretty mature, have good pipelines, but also have existing product lines that generate huge amounts of revenue. I think that a lot of folks are going to see those as safe plays they have in the past. There is growth potential, and so I think it's a better safe play than me putting the utilities last because you do in fact have growth potential.

But I don't see it being the blockbuster area of huge returns just because I think that for those stocks that you have that blockbuster potential, the prices generally reflect that. Yes, the prices are down from the nosebleed levels that they were at in the past, but they still reflect a premium that incorporates their ability if things go well, if clinical trials are successful, that reflects the potential future revenue and profits that those guys can generate. As far as in my portfolio, my biggest healthcare holdings, UnitedHealth (UNH 1.61%), huge insurance exposure. I like the mix of between traditional insurance and the Optum Healthcare Services. I think that that's more proactive areas of growth industry and I like what I've seen from it so far. I think it's a blue chip stock, Dow component, easy to trade. Yeah, UnitedHealth, UNH.

Frankel: Great. Jason?

Jason Hall: I rated and ranked it fifth. Matt, I think you and I ranked it the same. Ironically, you and I also have spouses that work in healthcare, too. So it's interesting. But I think part of the insight for me, my thought is healthcare, as a sector, makes up about 13% of the equity value of the market. GDP as a portion of GDP, it's closer to 20% in terms of spending. Now, that's not clean look because there's a lot of that that's not flowing to publicly traded companies. But I do think to a certain extent, that means there is some opportunity. I talked earlier about tailwinds, and I think with healthcare, there's definitely some big spending tailwinds. But to me, I think the easier opportunities to find, frankly, [laughs] are in real estate that's exposed to healthcare, for me, because that's an area that I understand.

I will say that I think there are some great companies doing things in biotech and biopharma. You really have to know what you're looking for to find them. I think one really interesting speculative company that I like a lot, I think it's more than speculative, but figuring out what it's really worth today versus its future is Fulgent Genetics (FLGT 1.24%), ticker FLGT. It's been a big, massive winner because of COVID testing and it's generated an enormous amount of cash and cash flow from that. I believe that their next-generation sequencing, NGS technology is really good. It seems that it is. Their combination of the wet work, the bench work, and the technology they use there for the actual testing and the AI, and the software that they use, like that marriage seems to be really good. Honestly, we're not going to know for a few years because all of their non-COVID business is like 10% of the revenue. It's growing very fast, like over 200% a year. Right now, the stock is trading like it's really cheap if COVID testing continues. If COVID testing goes away quickly, it's crazy overvalued. So figuring out what it's worth is the challenge there. But I think if it pays off like it could and the technology is as good as I think it is, it could be a wonderful, wonderful investment. But there's risk right here where we are now.

Frankel: Yeah, I generally avoid the healthcare sector just because it's probably the one that I understand the least, especially on the biotech side. One company that, like Jason said, is a risky one that I took a flyer on is 23andMe (ME -4.47%), the genetics company. They recently went public. Dan knows me too well that I'm a SPAC guy. They went public by SPAC. They were the one that Richard Branson, their company sponsored, the Virgin Acquisition Group. I like that. I think they have a big competitive advantage because they have 12 times the genotyped material as any other competitor. I think that will give them a big leg up when they are using that to develop pharmaceuticals. But like I said, not the sector I am most well versed on, and it's a very small investment for me. So I'm not the one you want to ask for the favorite healthcare stocks to buy.