The stock market
has had an excellent year for 2019, and one sector that’s been unusually hot
recently has been healthcare. Over the last two months, the healthcare stocks
in the S&P 500, as a whole, have nearly doubled the return of the rest of
the index.
That’s impressive,
and while many healthcare stocks are deserving of this rally, not all of them
are. This is especially true as we head into an election year. The election is
still eleven months away, but the candidates have very different ideas for how
our healthcare system should work. Naturally, that has an important impact on
which stocks will do well, and which stocks could be left behind.
Investing in
healthcare is a tricky business, and a lot of new investors can find themselves
making costly mistakes. First, I need to explain a few important
characteristics of investing in healthcare. There are few better businesses to
have than a thriving healthcare company. For one, you can get enormous indirect
support from the government. Healthcare firms almost have a legal license to
jack up prices each year. Just ask anyone who’s been to the pharmacy lately.
Another key aspect
of healthcare is the stability of the business. Spending on healthcare isn’t
greatly impacted by the heath of the economy. Not in the way, say, the housing
sector is. The stock market loves stability, and it will reward companies that
can deliver predictable profits each year.
One dangerous area
in healthcare is biotech investing. While there are some worthy biotech firms
out there, many are not. In fact, I don’t think most listed biotech stocks
should be publicly traded. The companies raise tons of money from gullible
investors before they even have products on the market. From what I can see,
the only thing they make is loads of press releases promising investors they’re
on the cusp of some great medical breakthrough. Yeah, right.
Many of these
biotechs are little more than lottery tickets. Sure, you might get the one that
pays off. But the odds are, you won’t.
I want to
highlight three healthcare stocks that I currently have rated as Strong Sells. Always
bear in mind that there’s a difference between a good company and a good stock.
If you own any of these three, you may want to consider selling as soon as you
can. If you had been thinking of buying any of them, you might want to consider
against it.
Steer Clear of
These Three Healthcare Stocks
Let’s start with Intuitive Surgical (ISRG). I want to be clear that I’m a fan of this company. In fact, a big fan. ISRG is helping to revolutionize surgery. Its da Vinci Surgical System transforms the surgeon’s natural hand movements outside the body into corresponding micro-movements inside the patient’s body. Importantly, this makes hospital stays shorter and therefore, less costly.
The shares got flattened in April after it missed earnings by
nine cents per share ($2.61 versus an estimate of $2.70). The stock plunged
over 6% in one day. The shares kept falling, and by the time of the June low,
ISRG had shed 20%.
Remarkably, the shares have rebounded and now trade at more
than 40 times next year’s earnings. Sorry, but that’s just too much. We’ve
already seen what can happen if ISRG misses earnings by a little. What would
happen if they missed by a lot? I love the technology but not the price. Sell
ISRG.
Next up is Edwards
Life Sciences (EW). The company is probably best known for its heart
valves. That’s a very good business to be in, and shares of EW have rallied
nicely. In the last three years, the S&P 500 is up 40%, but EW is up to
160%.
In October, EW
crushed earnings again. For Q3, the company made $1.41 per share. That beat
Wall Street’s consensus by 19 cents per share. Traders loved that news, and it sent
the shares into low-Earth orbit. Wall Street now expects 2020 earnings of $6.17
per share. That’s enough to give Edwards a forward price/earnings ratio of 38.
That’s simply not sustainable. EW is not worth chasing.
My numbers say
that Edwards deserves a nice premium to the market, but the current share price
is way above that. For now, Edwards Life Sciences is a sell.
Lastly, we have Align
Technology (ALGN). If you’re not familiar with Align, this is a very cool
company. They make Invisalign clear braces.
There’s a big
market for Align and business has been quite good, but I’ll caution you that
this stock can be a rollercoaster. Late last year, shares of ALGN shed 50% in a
few weeks.
Lately, the shares have been red hot again, which makes me nervous. Align gained nearly 40% in October. Earnings were outstanding, but I’m concerned that Align doesn’t seem to have the pricing power of its main rivals. For example, SmileDirectClub (SDC) is shelling out tons of money on advertising. They’re willing to lose money for now, and that may start to squeeze Align.
Based on the
latest numbers, Align Technology is going for 42 times next year’s earnings.
That’s way too much. However, if you’re patient, you may get a chance to buy
Align for a much lower price sometime in 2020. For now, Align Technology is a
sell.
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