Do certain sectors seem about as appetizing as eating a soggy Slim Jim? The last thing you want to do is sink your money into a sector that has no upward mobility. It's wise to be careful, particularly during these inflationary times.
But what about investing in the health care sector? It's worth digging into health care stocks because of their ability to transcend what's happening in the economy.
In this article, we'll take a look at healthcare stocks during inflationary times, why a particular healthcare stock may make a good investment, when these particular stocks do well, the stock performance of some top healthcare stocks and how to invest in these particular stocks. We'll also help you put some health care stocks on your to-research list.
Let's get started.
Healthcare Stocks and Inflation
Between the start of 1991 and the end of 2019, inflation on a year-over-year basis averaged about 2.3% a month and only went over 5% a handful of times. Not so over the past two years.
The Consumer Price Index for All Urban Consumers did not change in July 2022 after rising 1.3% in June, according to the U.S. Bureau of Labor Statistics. The all items index increased 8.5% over the past year.
A quick summary in July 2022:
- The gasoline index fell 7.7% in July
- The energy index fell 4.6%
- The food index increased 1.1%
- The food at home index rose 1.3%
- The index for all items (except for food and energy) rose 0.3%
Some indexes increased, according to the Bureau of Labor Statistics (shelter, medical care, motor vehicle insurance, household furnishings and operations, new vehicles and recreation) and some declined (airfare, used cars and trucks, communication and apparel).
Despite the fact that inflation has been low over the past decades, healthcare stocks remain one of the most important inflation mediators due to the worldwide aging population, advanced technologies and breakthroughs in clinical trials also encourage success in the sector. Healthcare has been known as one of the best defensive sectors because they have typically been unchanged due to economic demands.
Are Healthcare Stocks a Good Investment?
As with anything else, it's important to evaluate a wide variety of stock fundamentals before you invest. However, in general, it's possible to bank on health care companies because they typically provide returns in a wide variety of markets.
The general public always needs doctors and insurance companies, and the healthcare sector can help change the tide of your overall investment portfolio. It's no secret that the pandemic propelled healthcare stocks further, helping people get the products and services they needed. You'll also likely find cheap healthcare stocks and fat dividends that come along with them as well.
When Do Healthcare Stocks Do Well?
Shares of U.S. healthcare companies can do well in both good and poor economic times compared to other typically popular defensive sectors.
If you're curious about healthcare stocks in general, you can take a look at the healthcare index (SPXHC). The S&P 500 sectors have ebbed and flowed, including health care. Energy (SPNY) as well as value stocks (IVX) increased.
Healthcare stocks respond well in a few specific cases, including due to the aging population and Baby Boomers, people living with long-term diseases, epidemics, advances in technology, global and personalized medicine and other factors, according to a Reuters article.
Investing in healthcare stocks can provide excellent returns, but many factors can affect stock prices. Certain downsides to healthcare stocks may impinge on their ability to deliver returns to investors. The roadblocks that could cause healthcare stocks to do well include a single-payer system, the uninsured, cost roadblocks and consumerism.
U.S. healthcare spending grew 9.7% in 2020, at a rate of $4.1 trillion or $12,530 per person, according to the American Medical Association. U.S. spending on health care declined for the first time in 60 years in Q1 of 2022 and fell 1.7% year over year as healthcare prices fell relative to inflation, according to a recent Altarum report.
According to Modern Healthcare, healthcare prices in general should rise by 3.6% in 2022 and boost overall healthcare spending growth 4.6% to $4.5 trillion.
Prices grew:
- 2.7% in 2021
- 3.1% in 2020
- 1.1% in 2019
A recent AHA report showed hospitals have experienced surging costs in items and resources required to care for patients since the start of the COVID-19 pandemic.
Expenses per patient rose as follows:
- Labor: 19.1% between 2019 and 2021
- Travel nurse costs: 39% of nurse labor expenses by January 2022
- Supply costs: 21% per patient
- Median drug costs: 37% per patient
- Intensive care unit medical supply costs: 32% per patient
These facts and figures can help health care stock performance go up and/or down. It's a good idea to keep them in mind as you evaluate each stock on an individual basis.
Top Health Care Stocks List
Let's take a look at three top health care stock examples in order to help you choose the right investments for your portfolio.
UnitedHealth Group Inc. (NYSE: UNH)
UnitedHealth Group Inc. (NYSE: UNH), a diversified health care company, offers a wide range of services, including:
- Consumer-oriented health benefit plans
- Services for national, public sector and mid-sized employers
- Services small businesses
- Preventive, acute health care and chronic disease services
- Medicaid plans
- Children's health insurance and health care programs
- Health and dental benefits
- Hospital and clinical services
- Networks of care provider specialists
- Software and information products
- Advisory consulting arrangements
- Managed services outsourcing contracts
- Pharmacy care services and programs
In Q2, UnitedHealth Group showed revenues of $80.3 billion, which grew 13% year over year. Earnings from operations were $7.1 billion, a growth of 19% since last year. Cash flows from operations were $6.9 billion, 1.3 times net income.
Johnson & Johnson (NYSE: JNJ)
Johnson & Johnson (NYSE: JNJ) researches, develops and manufactures products under a wide variety of brands, including JOHNSON'S, AVEENO, LISTERINE, CLEAN & CLEAR, NEUTROGENA, OGX, TYLENOL, SUDAFED, BENADRYL, ZYRTEC, MOTRIN IB, NICORETTE, PEPCID, STAYFREE, CAREFREE, BAND-AID and NEOSPORIN.
The company creates treatments for rheumatoid arthritis, psoriatic arthritis, inflammatory bowel disease, psoriasis, HIV/AIDS and COVID-19, mood disorders, neurodegenerative disorders, schizophrenia, cardiovascular diseases and more.
Total sales for Johnson & Johnson grew 3% to $24 billion with operational growth of 8% and adjusted operational growth of 8.1%.
Eli Lilly and Company (NYSE: LLY)
Eli Lilly and Company (NYSE: LLY) develops and sells pharmaceuticals worldwide including the following major brands:
- Basaglar
- Humalog
- Humulin
- Jardiance
- Trajenta
- Trulicity
- Cyramza
- Erbitux
- Retevmo
- Cymbalta
- Zyprexa
- Cialis
Lilly's revenue in Q2 2022 decreased 4%. Total revenue grew 6%, including the U.S. approval and launch of Mounjaro for type 2 diabetes. Trulicity, Verzenio, Jardiance, Taltz, Retevmo, Mounjaro, Emgality, Olumiant, Tyvyt and Cyramza grew 20% and represented 67% of revenue in Q2 2022.
EPS decreased 31% to $1.05 on a reported basis and decreased 32% to $1.25 on a non-GAAP basis. The FDA approved Mounjaro® (tirzepatide) for adults with type 2 diabetes.
Lilly and Incyte's Olumiant® (baricitinib) also received approval, and so did Olumiant for certain patients with COVID-19. The company also announced plans to invest $2.1 billion in two new Indiana manufacturing sites.
How to Invest in Health Care Stocks
Let's take a comprehensive look at how you may want to approach investing in healthcare stocks.
Step 1: Check into metrics.
Digging into the metrics of individual stocks can help you decide how to choose investments you may want to invest in. Consider looking at dividend yield, earnings per share and price-to-earnings ratio. There are other metrics you may want to look at, but we'll go over the definition of these items.
- Dividend yield: The dividend yield tells you how much the company yields in dividends. Analyze the dividends per share divided by the current share price. High-yield dividends can be risky, so determine whether competitors have a much higher dividend yield than the stocks you're considering.
- Earnings per share (EPS): The earnings per share (EPS) shows how many outstanding shares of stock a company has. You can calculate it by finding out a company's quarterly or annual net income and dividing by the number of outstanding shares of stock it owns.
- Price-to-earnings (P/E) ratio: The price-to-earnings (P/E) ratio helps show you whether a company is fairly valued. To find the P/E ratio, you can divide a company's share price by its earnings per share.
Step 2: Open a brokerage account.
Do you have a brokerage account? If not, open a brokerage account and fund it. You can choose from three types of brokerages, including online brokers, discount brokers and full-service brokers. Let's take a look at the definition of these three options:
- Online brokers: Online brokers offer an online option for investing. You can typically depend on speed, ease of use and low commissions with an online brokerage.
- Discount broker: A discount broker performs buy and sell orders at lower commission rate compared to full-service brokers.
- Full-service broker: Full-service brokerages provide a wide range of investment services, including tax tips, research and investing on their behalf, to name a few.
No matter which direction you prefer, it's a good idea to look at the fees involved, platforms available to you and more. You want to be sure you choose the right option for your needs.
Step 3: Buy the number of shares you want.
Choose the number of shares you want to purchase and hit the "buy" button. Choose the right investments that meet your specific goals and investment timeline. Consider investing on a monthly basis in order to build on compound interest over the long term.
Health Care Stock ETFs
The healthcare sector offers a wide range of large and small companies to invest in. However, you can invest in more than just stocks. You can invest in mutual funds and exchange-traded funds (ETFs) to add diversification to your holdings. An ETF works like a mutual fund — a pooled investment — but you can buy and sell at any time during the trading day, like a stock.
Here is a list of healthcare ETFs you may want to consider investing in:
Still interested in other options? Learn more about cancer stocks.
