A big allure of investing in healthcare is that the industry tends to have stocks stable enough to provide you with some long-term safety. Given that the need for healthcare will only grow with an aging population, the industry is also home to some solid growth stocks.
Three relatively safe healthcare stocks that have doubled in value over the past five years include Thermo Fisher Scientific (TMO 4.78%), McKesson (MCK 0.89%), and Intuitive Surgical (ISRG 2.21%). Let's find out a bit more about these three growth stocks and see if they are still good buys today.
1. Thermo Fisher Scientific
Thermo Fisher Scientific is one of the largest healthcare companies in the world, with a market cap of $200 billion. Its diverse business involves multiple segments, including life sciences, analytical instruments, specialty diagnostics, and lab products. Thermo Fisher dove deeper into services with its 2021 $17.4 billion acquisition of PPD, a company that specializes in offering clinical research services.
This year, Thermo Fisher expects revenue to come in at around $45 billion (similar to last year) and for core organic growth -- which excludes COVID-19 testing revenue -- to total 7%. That's down from 14% in 2022 but is still a solid rate nonetheless given the current macroeconomic conditions that are weighing down many other businesses.
As the healthcare industry continues to expand, so will the demand for Thermo Fisher's products and services. Up 140% in the past five years, it has soundly outperformed the S&P 500, which has gained 56% over the same time frame. It's not a cheap stock (it trades at 30 times earnings), but Thermo Fisher has a strong track record for growth and acquisitions, and it's one of the safer healthcare stocks to buy. It also pays a modest dividend that yields 0.3%.
2. McKesson
Another relatively safe healthcare company to invest in is pharmaceutical distributor McKesson. Its strong moat and few competitors ensure that its position in the industry will remain stable for the foreseeable future.
In its latest fiscal year, which ended in March, revenue totaled $276.7 billion. Although McKesson's profit margin is fairly thin, its earnings still came in at $3.6 billion. The stock also offers a modest 0.6% dividend yield to go along with its impressive gains.
In the past five years, the stock price is up by 175% -- the biggest jump on this list. That's in large part due to the relief that investors felt after learning that McKesson, along with other pharmaceutical distributors, reached a settlement related to the opioid crisis, helping to limit their financial liabilities. For its role in the serious public health issue related to the legal (and illegal) overprescribing of opioid drugs, McKesson will pay out $7.4 billion in compensation, but that's over a period of 18 years.
McKesson can still be a good stock to hold, but investors should recognize that the catalyst driving its recent gains (the opioid settlement) isn't a recurring one. But at 18 times earnings, this could be a solid, low-volatility healthcare investment to hold in your portfolio.
3. Intuitive Surgical
If not for the bear market, Intuitive Surgical is the stock I would have expected to be up the most of the three stocks on this list. Instead, its five-year gains are the lowest at around 100%. Intuitive's da Vinci surgical devices have the potential to transform the healthcare industry by allowing surgeons to be more precise with the use of robotic arms.
From $3.1 billion in revenue in 2017, Intuitive's sales doubled to $6.2 billion this past year. The company generates steady, consistent growth as surgeons perform more da Vinci procedures. That helps drive more demand for instruments and accessories, which make up the bulk of the company's recurring revenue. For the three-month period ending March 31, instrument and accessory sales totaled $985.6 million, accounting for 58% of Intuitive's top line and increasing 22% year over year. Meanwhile, the company reported procedure growth of 26% during the first quarter as overall usage continues to rise.
Intuitive's stock trades at a hefty 70-plus times earnings, but as the business continues to scale and its bottom line improves, that multiple will inevitably come down given Intuitive's gross margins are fairly high at around 67%.
For long-term investors, Intuitive Surgical may be the best stock to buy on this list because although it's the laggard right now, that's not a trend I would expect to continue over the next five years.
