Insights

2 Trends That Suggest Healthcare Stocks Can Beat the Bear Market

Healthcare is generally a safe place to invest. It’s an essential service that everyone needs. If nothing else, it can grow along with the population and as more people require care.

Even during the current bear market, this industry might be an optimal place to invest your money. Year to date, the Health Care Select Sector SPDR Fund has only fallen 7% while the S&P 500 has declined by 14%.

A couple of promising trends suggest this pattern could continue for the foreseeable future. Let’s take a look at what they are.

Medical procedures are on the rise

During the early stages of the pandemic, there were serious concerns about the healthcare industry’s ability to treat people. That meant focusing efforts on COVID and delaying other procedures, including surgeries. However, now that vaccines have been widely distributed and people are resuming their pre-COVID lives, hospital procedures appear to be normalizing as well.

Intuitive Surgical (NASDAQ: ISRG) makes robotic-assisted da Vinci surgical systems that can help physicians perform difficult surgeries quickly and accurately. A key metric the company tracks is the growth in those procedures, which helps investors see the level of adoption of the da Vinci devices. For the period ended June 30, Intuitive reported a 14% increase in da Vinci procedures, marking the sixth consecutive quarter with a growth rate above 10%.

You could argue that the da Vinci systems are still in their early adoption stages, so growth wouldn’t be unusual, even amid COVID disruptions. However, even healthcare company Johnson & Johnson (NYSE: JNJ) has continued to see strong growth in its medtech segment, which includes surgical devices. The period covering the last three months of 2020 was the last time the company reported negative operating growth in its devices segment. Since then, the segment has been growing. For the period ended June 30, its reported sales were technically down 1%, but that was only due to foreign exchange.

Overall, it’s a promising sign for the industry that hospital procedures appear to be on the rise.

Pharmaceutical sales have also been increasing

Another way to gauge the industry’s strength is through prescriptions and pharmaceutical sales. A rise in those numbers suggests patients are seeing doctors regularly again. Using Johnson & Johnson as another example, this trend looks to be even stronger as the company has reported operational sales growth of at least 12% for its pharmaceutical business in four of the past five quarters.

Similarly, pharmacy retailer Walgreens Boots Alliance (NASDAQ: WBA) has also seen encouraging growth in its business. The company’s comparable pharmacy sales in the U.S. have been north of 5% in four of its last five quarterly results. Walgreens, however, hasn’t been one of the safer stocks to own this year (it’s down 24%) as investors have been worried about whether its sales will dip since COVID previously boosted traffic to its stores. The company has also been wavering on selling its Boots U.K. business (for now, it has decided not to), so its future growth prospects remain uncertain.

Not all healthcare stocks will be winners

Shares of both Walgreens and Intuitive Surgical are down more than 20% this year. They haven’t been market-beating stocks because they come with their own specific risks; Intuitive trades at a high earnings multiple of around 60, while Walgreens hasn’t generated consistent growth.

But if you stick with healthcare stocks that trade at reasonable earnings multiples (e.g., less than 20) and have strong prospects for future growth, you could be in a good position to outperform the markets this year. And when in doubt, you can go with an exchange-traded fund like the Health Care Select Sector SPDR Fund, which will give you broad exposure to the entire sector.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Intuitive Surgical. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.

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