The healthcare sector is a gigantic one with branches dispersed across various industries like hospitals, pharmaceuticals, health insurers, and medical device manufacturers.
The role of market trends in these industries was evident during the pandemic. For instance, companies involved in vaccine manufacture and diagnostics enjoyed a substantial rise in demand, while medical device manufacturers saw a slump, given the fall of elective surgeries.
Although investing in the health industry can lead to promising returns, it is important to understand the industry trends for the sector of your choice.
Why Invest in Healthcare Stocks?
The Healthcare sector calls in for some lucrative opportunities. This second largest sector of Standard & Poors' 500 comprises nearly 10% of the Nasdaq Composite Index and is as massive and diverse with incredible potential for growth.
From traditional sectors like drugs and insurance to new sectors like robotics and medical cannabis farms, many options are available for investing in and making a diverse portfolio.
Types Of Healthcare Stocks For Investment
The healthcare sector involves manufacturing and production and service-oriented industries. Here we talk about the six subsectors that make up the vast healthcare sector so that you understand what you are investing in.
1. Pharmaceuticals
This sector includes generic drug manufacturers and giants like GlaxoSmithKline PLC, Novartis AG, Big Pharma, and Pfizer.
The leading companies have a stable source of income through the manufacture of prescription and over-the-counter drugs. However, the greatest portion of profits comes from the patent of new drugs they research and develop, such as Pfizer, which developed the COVID-19 vaccine in conjunction with BioNTech.
Nonetheless, it is crucial to remember that once the patent expires, coiled with the competition against less expensive generic drugs causes a dig at sales. On the contrary, generic drug manufacturers benefit from government and insurance incentives, albeit with narrower profit margins.
This is why it is essential to be familiar with the market trends through pharmaceutical data from Ozmosi to make better investment decisions.
2. Biotechnology
An up-and-rising sector at the forefront of creativity is biotechnology. As the sector is more focused on ‘breakthrough’ drugs and treatment, there is often confusion as to whether it simply falls under the pharmaceutical industry, but there are definite distinctions.
For instance, large drug manufacturers rake in huge profits, unlike biotech firms, which suffer from the whims of a fluctuating stock market. This is because FDA approval can take years, so investors have to wait to see returns.
3. Medical Equipment
This includes both spectrum extremes, ranging from bandages and syringes to laparoscopic instruments and CT-scan machines.
Investors can expect a profitable increase in stocks depending on the product demand and long-term utility. Big players in this sector include Johnson & Johnson and Philips.
4. Sales And Distribution
Wholesalers, retailers, and pharmacies make up this sector and are greatly dependent on consumer demand and current medical regulations.
Nevertheless, healthcare products are always in demand and ever-growing, making this a growth industry.
5. Managed Healthcare
A milder name for insurance companies that comprise the bulk of the healthcare sector. Given that healthcare coverage is an indomitable part of peoples’ lives, returns are stable, and there are few competitors or disruptors.
6. Healthcare Facilities
This includes hospitals, clinics, physician offices, nursing homes, and other healthcare facilities. With the widespread availability and necessity for these facilities, investing in the sector is lucrative. However, the pandemic has shown that may not be the case as routine doctor visits and hospitals grapple with the immense demand for services. Moreover, this sector is also influenced by real estate trends to a certain extent.
How To Invest In Healthcare
Investing in the healthcare sector can be done through individual stocks, mutual funds, and ETFs. Your investment goal, income portfolio, and company profitability chiefly determine this.
Additionally, there are public trust funds specializing in healthcare facilities called real estate investment funds. This doubles as real estate and healthcare simultaneously.
Here are factors that should determine where you should put your money.
1. Growth Potential
This is an essential factor for any investment, and growth potential can be judged by a company’s performance over the past years. Observing competitors will also provide additional insight.
2. Ratios
The price-to-earnings ratio is the most important ratio to gauge a stock’s real worth. This compares the stock price against the earnings per share, and you can also compare it with other stocks in the industry for better judgment.
3. Financial Performance
An important criterion to understand a company’s profitability and prospects. Another indicator is the Free Cash Flow or FCF which is the funds left after spending capital and operating: the more the FCF, the stronger the company.
4. Dividends
This is the portion of the company’s profits that increase your return when your stock. The higher the company's earnings, the more likely it will pay dividends in the future.
5. Megatrends
With an increasingly health-conscience populace, one of the recent megatrends has been the health sector has seen a shift from drug-centric to preventive medicine. This should be another decisive factor in determining which industry you want to invest in.
The Pros And Cons Of Healthcare Stocks
The health sector has been growing exponentially faster than ever. Investing in stocks of companies that deal with the chronic conditions afflicting the aging population and technological advancements is best.
As the health sector is defensive, steady earnings and high returns aren’t greatly affected by the general stock market. This makes it a safe investment that has a considerable degree of immunity from market fluctuations. Experts recommend pairing health sector stocks with high growth potential but risky cyclical stocks for best results.
On the other hand, one major drawback is that strict regulatory standards such as those established by the FDA and government can control how the stocks perform. In addition, since the sector is directly related to consumer demand, public opinion often governs sales and profits.
Conclusion
The healthcare sector is a profitable industry with diverse subsectors that can meet the requirements of any kind of investor looking for an impressive portfolio. The tremendous growth potential and steady market trends also make it a safe investment choice.
However, the choice of company or sub-sector relies on several factors, which are not without risks. A smart investor should thoroughly research the market trends and consumer demand before putting into any stock.
