Four Ways to Invest in Healthcare Stocks
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In December 2017, Frost & Sullivan predicted that the global healthcare industry's manufacturer revenues would continue to grow in 2018, and would cross the $1.85 trillion mark by the end of the year. In 2017 alone, digital health investment rose a whopping 109% from $6.5 billion in 2016. Frost & Sullivan, in their yearly Transformational Health report, stated that this growth is expected to be driven by advancements in technology platform solutions that lead to innovation in healthcare and chronic disease management, as well as through the emerging markets.
In fact, Deloitte's 2018 Global Health Care Outlook report reveals that global healthcare spend is likely to increase at a CAGR (compound annual growth rate) of 4.1% between 2017-2021, compared with a mere 1.3% between the previous period of 2012-2016. All of these statistics certainly make investing in healthcare stocks seem like a good idea. Add to that the fact that Charles Schwab gave an 'Outperform' rating to this sector on September 27, 2018, and medical stocks seem to become even more attractive.
In fact, healthcare stocks rank third after the technology and finance sector in the S&P 500 index. However, even for a sector that appears extremely appealing, it's important to make informed investment decisions using the right analytical tools, and remain updated with the latest news and economic announcements within the sector. And this really is a large sector that goes far beyond hospitals and pharma companies. Here's a look at the various types of companies you can choose from when searching for the best healthcare dividend stocks.
Pharmaceutical companies produce almost all over-the-counter (OTC) and prescription drugs. Large pharmaceutical firms are usually less risky to invest in, as compared with their younger or smaller counterparts. These companies spend a major portion of their resources on R&D (Research & Development), to bring innovative treatments to the market. So, if a company releases a new drug with huge earning potential, its stock will perform well. You may find a small group of healthcare stocks collectively called "Big Pharma," which consists of the large cap pharma companies. However, even when investing in 'Big Pharma', you should have knowledge concerning:
- The scope of the drugs
- The scale of the people affected by the disease the drug addresses
- The availability of substitutes and drugs by competitors
- Intellectual property rights related to the process of manufacturing and the drug's patent
- Profit and revenue division pacts with other companies
The clinical trials conducted before a drug is launched, and their outcomes, also affect share prices in the healthcare segment. Positive outcomes tend to drive prices up, while negative outcomes could even potentially lead to a crash. Investment in pharma companies, therefore, requires active analysis by investors.
Hospitals and clinics are the foundation of any healthcare system. Therefore, when their stock is available for investment in, they do tend to offer good investment potential. Here, too, the larger companies would offer more stable potential and lesser risk. Of course, risk is always a part of any investment, and using good risk management strategies is vital.
Healthcare service providers are subject to enormous regulatory risks. Hospitals often make quick and costly hardware, and software changes for better facilities, and to attract more patients. This might however, make the hospitals prone to bad debt, and may also affect their dividends. Medical insurance firms are also an important player in the healthcare services sector. They pay the bills, so, the better the underwriting, the lower the medical costs incurred by the insurance company will be.
This is why it's important to analyse the medical cost ratio, and medical loss ratio before investing in such healthcare sector stocks. The insurance industry is also highly volatile, due to changes that take place in regulatory framework. However, their stocks tend to be less volatile than hospital stocks. You need to keep an active eye on the regulatory framework to minimise losses associated with these stocks.
Medical Device Stocks
With increasing life expectancy, medical devices are becoming more important than ever before. Medical device firms generally witness a slow growth rate. The products offered by them range from bandages to artificial joints, and from digital blood pressure monitors to heart stents, and much more. Such devices will always be in demand, but an instant boom of any specific device is unlikely.
These firms also spend a large share of their resources on R&D, as well as the stages after R&D. Here, there are older, more stable firms, as well as small startups with great potential for growth. Healthcare software providers offer greater potential for growth than hardware manufacturers. Today, hospitals worldwide are adopting automated systems to offer better services to patients.
On the other hand, advances in technology are bringing AI and robotics into the healthcare system, changing the way medical care is provided. You need to study about the technology, the substitute products, and the competitors of a firm before investing. Adoption rates and gross margins typically determine the success of these healthcare technology stocks.
Investment in biotechnology stocks is generally considered high yielding, although it does entail risks as well. You may also consider investing in stocks of companies that are involved in R&D for the treatment of chronic and terminal ailments, such as cancer, AIDS, diabetes, heart disease, neurological diseases, immunological diseases, viral infections, stem cell and tissue regeneration. If these projects are successful, they will greatly impact the lives of people worldwide, which in turn would drive up the share price.
You might even consider investing in companies with a strong network of collaborative support, indicating that it is financially and logistically stable. Biotech stocks nearing the end of their R&D stage, or awaiting approval from the regulatory authorities are also likely to be better investment options. However, remember that if the clinical trial fails to produce the desired outcome or there are regulatory hurdles, the share price might decline.
A 3-Way Investment Solution for Healthcare Stocks
- Big Pharma Companies: Investing in companies with large market capitalisation tends to be less risky. They don't offer explosive growth, but they do have stability.
- Healthcare Real Estate: With increasing demand for healthcare, there will also be a need for more hospitals, labs, and clinics to meet the demand. Healthcare real estate investment funds, therefore, prove to be a viable option for investment. However, remember to research the credit ratings of the REITs before investing in one.
Some examples of REITs include:
- Alstria Office REIT-AG CFD (AOX)
- Hamborner REIT AG CFD (HAB)
- Tritax Big Box REIT Plc CFD (BBOX)
- Healthcare ETFs: If you are unsure about investing in individual health care stocks, you could also consider investing in healthcare ETFs. Healthcare ETFs are designed to track the performance of the healthcare sector, and provide an easy way to gain exposure to the sector, without having to know much about the individual companies. ETFs include health insurance and managed-care companies, along with associated businesses, such as pharmacy benefits management, and treatment providers.
Here are some examples of healthcare ETF CFDs:
- iShares Global Healthcare ETF CFD (IXJ)
- iShares U.S. Healthcare ETF CFD (IYH)
- iShares U.S. Healthcare Providers ETF CFD (IHF)
Diversification is important for any investment portfolio, and healthcare offers great potential in this regard. Investing in healthcare stocks can provide good returns, but it also has various risks attached to it. This sector offers a number of options and sub sectors to choose from for your investment, so picking the right investment instrument is the first step to success. If you are new to the sector, you may consider investing in big-cap firms or healthcare ETFs to start with. You should also consider using online analysis tools to monitor the movement of stocks in the healthcare sector.risks.