Healthcare stocks are an attractive prospect right now. Nearly 18% of the U.S. GDP went toward healthcare in 2021, which will only continue growing as the population gets older and sicker. This structural trend should be a rising tide that lifts all boats and will likely play out globally.
But which are the best healthcare stocks to buy? There are plenty to choose from. The sector has various players, including insurers, device makers, and pharmaceutical giants. There’s also a new and growing market for virtual doctors. Artificial Intelligence also has an iron in the fire— from training new surgeons to removing human error from the diagnosis process.
There are some important considerations for long-term investors looking to ride the healthcare wave for the next decade or so. The first is stability. Sure, the prospect of AI in the operating room sounds cool— but we’re still pretty far off from becoming a true profit driver. Companies with large, diversified businesses within the healthcare arena make for good picks. Many of these companies also pay dividends and have a solid track record of rewarding investors.
Dividends aren’t bad, but it’s important to watch how much money these companies are investing in growth. If a company sends all of its excess cash back to investors, that tells you that investing in new growth for the business isn’t expected to generate great returns. So it’s important to find companies that can strike a healthy balance.
Healthcare Stocks: Zimmer Biomet (ZBH)
Zimmer Biomet’s (NYSE:ZBH) bread and butter is a large-joint reconstruction. It’s a top player in the hip and knee replacement market, and its strategy is to expand its suite of offerings to capitalize on that position. This should offer a host of cost savings and synergies to boost margins. The group’s been working to streamline its operations as it gobbles up smaller competitors through strategic acquisitions. First quarter results suggested the strategy is a winning one, with revenue growth across all categories underpinning improved guidance.
Zimmer does have some challenges ahead. The industry is shifting from a model where surgeons were primary decision makers to one where purchasing is made at the hospital level. Healthcare reform means hospitals will be looking to trim their costs, and that could impact Zimmer’s ability to muscle into new markets. Safety will be a key differentiator, so the group’s quality control must be flawless moving forward.
For now, Zimmer looks to be in a strong position to maneuver as the industry develops, and its growth strategy looks promising.
UnitedHealth Group (UNH)
UnitedHealth Group (NYSE:UNH) has a stronghold on the US health insurance market, and its sprawling size makes it an excellent pick for long-term investors in healthcare stocks. While history doesn’t necessarily tell us anything about the future, it’s promising to know that the group has a long track record of delivering revenue growth.
UNH has two segments. UnitedHealthcare is its largest, providing healthcare benefits to individuals and employers. Senior benefit offerings have been bolstering revenue here lately, and it’s been able to win new Medicaid contracts in new markets, which will continue fuelling growth.
But it’s Optimum, UNH’s other sector, where the most exciting growth prospects lie. This part of the business manages benefits and uses IT to streamline healthcare plans. This part of the business recently took the LHC group under its umbrella, a business geared toward chronically ill patients.
UNH has plenty of room to grow, and management’s been allocating a fair amount of spend to those prospects. But the group also pays a dividend, albeit a modest one yielding under 2%.
Pfizer (NYSE:PFE) was one of the healthcare stocks that skyrocketed after the Covid pandemic thanks to its involvement in creating a vaccination. But now that the population isn’t storming in to get vaccinated, the stock has fallen somewhat out of favor. That offers a buying opportunity for long-term investors.
While some of its peers look to buy back stock now that their valuations have returned to earth, Pfizer’s invested in its pipeline, and pipelines are the be-all-end-all for pharmaceutical stocks. Drugmakers must constantly come out with new treatments or new uses for existing treatments to protect their margins. Once their treatments have passed a certain period, generic medicines can enter the market, making a once-strong revenue stream a lot less so.
On top of that, Pfizer hopes to squeeze a little more out of its Covid vaccine, with a combined covid and flu vaccine expected to hit the market in 2026. While the same volume of people may not be getting the jab, Pfizer will be able to charge more since government intervention will no longer keep a lid on prices.
On the date of publication, Marie Brodbeck did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.