6 Healthcare Stocks With Plenty Of Room To Grow

by: BubbleBustInvesting

Investors too busy following Q3 may have missed out on a trend that is expected to have a strong impact on equity markets: The massive aging of baby boomers that began around 2005, as the first baby boomer cohort crossed the age of 60. This trend is expected to last until 2024, when the last cohort crosses the age of 65. The portion of the world's population that is over 60 is expected to reach 30% by 2025, compared to 20% in 2000. But how can investors take advantage of this trend?

The obvious strategy is to buy shares of companies that serve the healthcare needs of baby boomers. The problem, however, is that the healthcare industry is highly regulated, and government and large insurance companies enjoy monopolistic power. This means that two types of companies can survive and thrive in this environment. First, large generic drug makers like Mylan (NASDAQ:MYL), Watson Pharmaceuticals and Teva Pharmaceutical Industries (NYSE:TEVA) that help cut healthcare costs. Second, companies with products and services consumers must have like orthopedic devices makers Stryker (NYSE:SYK) and Zimmer (ZMH), and robotic surgery Intuitive Surgical (NASDAQ:ISRG).

The three generic companies enjoy two advantages over other companies in the industry: First, a larger scale and the cost benefits associated with it. Second, a long experience with the FDA approval process. The three companies with unique healthcare devices enjoy three advantages over other companies in the industry, with innovation, sales network, and close relations with medical service providers, especially Intuitive Surgical. Let's take a closer look at the fundamentals of these companies.

Mylan. The world's largest generic drug maker has a low PE, a hefty profit margin, and a strong portfolio of drugs. Last Friday, following the FDA approval for Meclizine Hydrochloride Tablets, a generic version of Pfizer's (NYSE:PFE) Ativert, Mylan's stock hit a 52-week high.

Watson Pharmaceuticals. A maker of both generic and brand name drugs, Watson enjoys a low PE, high operating margins and revenue growth. Most notably, Watson has a diverse portfolio of products that treat major health problems, from cardiovascular diseases, to nervous system disorders and urology. Last week, the stock hit a 52-week high.

Teva Pharmaceuticals. Israeli-based Teva enjoys the best fundamentals among the three. The company also has a diverse portfolio of generic drugs that stretches from drugs that treat sleeping disorders to drugs that treat rare and devastating diseases like Leukemia and Parkinson's. Also, the company pays a 2 percent dividend, which makes it an attractive investment in this low-interest environment.


Forward P/E *

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Teva Pharmaceutical Industries





Watson Pharmaceuticals





*Fye Dec. 31, 2013

+As of June 30, 2012

Source: Yahoo Finance.

Stryker: This company is a leader in medical/surgical equipment and orthopedic implants. Since it went public in 1979, sales and earnings have grown at a very rapid rate. Sales reached $8.45 billion in 2012, up from 7.3 billion in 2010. It trades at a forward P/E ratio of 12.

Stryker's success comes from three sources. First is its operational effectiveness -- the ability to cut costs and improve quality to comply both with strict FDA standards and government mandates to reduce healthcare costs. Second is the introduction of new products through internal R&D and acquisitions. In 2010, for instance, the company received 108 patents and acquired the neurovascular business of Boston Scientific (NYSE:BSX). Third is the nurturing of a strong corporate culture, exemplified by the company being ranked 68th on Fortune Magazine's "100 Best Companies to Work For" list from 2011.


Forward P/E *

Operating Margins+

Quarterly Earnings Growth (yoy)+

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Intuitive Surgical





*Fye Dec. 31, 2013

June 30, 2012

Source: Yahoo Finance.

Zimmer Holdings: This company is in a business similar to Stryker, although it's more diversified. It designs, develops and manufactures orthopedic reconstructive devices and dental implants that restore function of certain body parts. The company markets its products in the American, European, and Asian markets.

After suffering a setback in the aftermath of the 2008 recession, Zimmer Holdings has regained its earnings growth momentum -- its quarterly earnings were up 348% in the last quarter. As is the case with Stryker, Zimmer is a well-managed company that has effective cost controls and is growing through new product introductions, acquisitions, and entry into new markets.

Intuitive Surgical: This company is in the robotic surgery business, which is growing by leaps and bounds (as can be seen in the above table). The company designs and manufactures state-of-the-art technology like the da Vinci Surgical System for various procedures such as urologic, gynecologic, cardiothoracic, and general surgeries. The da Vinci System consists of a surgeon's console or consoles, a patient-side cart, and a 3D vision system.

Intuitive Surgical enjoys a number of advantages that give the company a near monopoly in this area. There is a "first mover" advantage, which made the da Vinci Surgical System a standard in the industry. Also, there are the economies of scale which give the company a cost advantage. In addition, there is the bundling of hardware with services like doctor training, which makes the cost of switching to different machines prohibitively high.

The bottom line is that Mylan, Watson Pharmaceuticals, Teva Pharmaceuticals, Stryker, Zimmer Holdings, and Intuitive Surgical are six stocks to buy and forget for the next 10 years.

Disclosure: I am long MYL, SYK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.