Healthcare has always been a popular sector in our yearly January survey of the newsletter community's favorite stocks. In MoneyShow's 35th annual Top Stock Picks report, we see a notable shift away from traditional large-cap pharmaceutical stocks to more specialized niches such as life sciences, vaccines, medical marijuana, opioid addiction and women's health.
David Toung, Argus Research
Integra Life Sciences Holdings Corp. (IART) is a leader in medical implants and instruments for neurosurgery, tissue regeneration and wound care. This company is a leader in medical implants and instruments for neurosurgery, tissue regeneration and wound care.
The company's products are used in cranial and spinal procedures, peripheral nerve repair, small bone and joint injuries, and the repair and reconstruction of soft tissue.
We believe Integra is positioned to benefit from a bounce-back in procedural volumes in 2018 following hurricane-related outages impacting 2017.
We also have a positive view of the October 2017 Codman acquisition, which added neurosurgery products and expanded overseas sales. Integra recently traded at 20.6-times our 2018 EPS estimate, above the average of 19.1 for peers in our med-tech coverage universe.
However, we believe this premium is warranted given Integra's strong sales growth, steady flow of new products, success in integrating acquisitions and rising margins.
As the smallest med-tech company in our coverage universe (by market cap), Integra is also moving the needle on revenue and EPS growth from its recent M&A deals.
John Persinos, Breakthrough Tech Profits
Whether for recreational or for medicinal purposes, marijuana is one of the hottest areas of biotechnology research. Pot is quickly losing its pariah status to become a huge, mainstream business.
However, most of the tiny OTC-traded stocks proliferating in the marijuana space are too risky. That's why I like 22nd Century Group (XXII) , a small-cap biotech that genetically engineers cannabis and tobacco plants to change their chemical potency.
22nd Century is small enough to confer outsized gains but large enough to weather market turbulence.
THC-free marijuana is sought by medical scientists, farmers and agricultural programs. Its researchers are creating so-called enabling tools that expedite the targeted bioengineering of cannabinoid production in the cannabis plant, with the goal of creating new strains of cannabinoids for new drug treatments and agricultural applications.
Among the company's key initiatives is the development of a new strain of hemp containing zero THC, the key psychoactive compound in cannabis. THC produces the chemical high in the human brain that got marijuana banned on the federal level.
22nd Century isn't just limited to marijuana. The FDA is making the development of low nicotine cigarettes a regulatory priority. That's good news for 22nd Century; it has the ability to make cigarettes with nicotine levels 95% lower than conventional cigarettes.
It is the only firm in the world that possesses well-tested technology to grow tobacco leaves that carry nicotine beneath the FDA's recommended threshold for addiction.
Marijuana used to be synonymous with anti-establishment rebellion. But in the words of Bob Dylan, "The times, they are a-changin'." Social and legal changes favorable to the marijuana industry will accelerate in 2018.
Rob DeFrancesco, Tech-Stock Prospector
Veeva Systems (VEEV) , a provider of cloud-based software for the life sciences industry, remains on track to meet its 2020 revenue run rate target of $1 billion.
For fiscal 2019 (ending January), the company's initial revenue guidance of $805 million translates into expected growth of 18.3% based on the fiscal 2018 guidance midpoint of $680.2 million.
The company recently closed new contracts with two Top 20 pharmaceuticals companies that started U.S. deployments, along with a Top 20 pharma vendor with a deployment in Japan. All three were expansion deals with existing customers (involving new divisions or countries).
The firm's Vault RIM, the first-ever suite of unified regulatory cloud applications, streamlines product submissions and registrations, and helps to reduce the complexity in the drug manufacturing process.
Some Vault customers are seeing productivity gains of 30% to 50% because many are coming off of legacy systems that were designed in the 1980s.
The clinical segment of the Vault business really shined in the latest quarter, with the customer count for the eTMF product (used to manage documents related to drug clinical trials) surpassing 170.
Vault also provides a growth wildcard for use cases outside of life sciences. Many manufacturers still use older quality control solutions, so it's a market ripe for disruption.
Doug Gerlach, SmallCap Informer
As the world faces an increasing onslaught of new threats from biological and chemical weapons, viruses, and epidemics, one company is making products and treatments to assuage these risks.
Emergent BioSolutions (EBS) is a global specialty life sciences company focused on providing solutions that address medical and public health preparedness and response against accidental, intentional and naturally emerging public health threats.
Emergent was founded in 1998 and currently offers eight products in the chemical, biological, radiological and nuclear (CBRN) defense line. Six target biological threats (anthrax, botulism and smallpox) and two target chemical threats (nerve agents).
The company's pipeline includes therapeutics for influenza, dengue and Zika, as well as vaccines for anthrax, Ebola and Zika. A continued focus on preparedness by the U.S. government will help drive growth for Emergent BioSolutions. Federal policies that foster innovation support rapid development and response for companies like Emergent.
Globalization increases the likelihood of rapid disease transmission (as in the case of pandemic flu, Ebola and Zika), and the rising threat of antimicrobial resistance also demands new treatments.
During the quarter ended Sept. 30, Emergent closed on acquisitions that include the only smallpox vaccine licensed by the FDA, and of raxibacumab, an FDA-approved anthrax monoclonal antibody.
Both acquisitions include the responsibility to fulfill long-term contracts to provide the products to government agencies. The company also signed contracts with the departments of Defense and State.
Analysts are looking for 20% annual EPS growth from Emergent over the next five years. We are a bit more conservative but see 15% annual growth as sustainable for both revenues and EPS.
Jim Fink, Velocity Trader
Utah Medical Products (UTMD) manufactures medical devices for women and babies that are predominantly proprietary, disposable and for hospital use.
More than half of sales (53%) are dominated by gynecology, including surgical contraception and urinary incontinence therapy. Women's healthcare is an especially lucrative segment. Women undergo more medical procedures than men, because they get pregnant and they live longer.
The tailwind for healthcare stocks provided by the aging of America and increased government spending on health services is so strong that there is no reason to believe that stocks like Utah Medical can't continue to outperform other industrial sectors for the foreseeable future.
CEO Kevin Cornwell has been at the helm of Utah Medical for 25 years. He's an honest straight shooter. The integrity of a corporate leader is one of the most important attributes of a successful business.
Financial performance has been stellar before and during Cornwell's tenure as CEO, which began in 1992. The stock's annual return on equity has averaged 28% in the 31 years since the company turned profitable in 1986, only four years after it went public in 1982. Even over the more recent past, Utah Medical has exhibited tremendously consistent profitability.
A transformational acquisition occurred in 2011 when the company bought England-based Femcare Holdings Ltd., manufacturer of the Filshie Clip System for permanent female sterilization.
The acquisition was paid for with existing cash and low-cost debt. Earnings per share have grown every year since then. Six years after the acquisition, Utah Medical is debt free thanks to positive annual operating cash flow.
The P/E remains below its average peer, as well as the S&P 500. There's plenty of room left for CEO Cornwell to steer the stock toward further capital appreciation.
Bill Mathews, The Cheap Investor
Rite Aid (RAD) is our top stock for 2018 because it has excellent fundamentals, a huge influx of cash from the sale to Walgreens, and fewer stores that will make it much easier to restructure. The company is one of the nation's leading drugstore chains currently operating more than 4,500 stores in 31 states.
In October 2016 Walgreens Boots Alliance (WBA) announced it was buying Rite Aid for $9.4 billion. However, it became obvious that the FTC was not going to allow the #1 and #3 drugstore chains to merge, so they came up with an agreement where Walgreens would acquire Rite Aid's stores on the East Coast.
In September 2017 the companies secured regulatory clearance for that asset purchase. The agreement calls for Walgreens to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for an all-cash purchase price of $4.375 billion on a cash-free, debt-free basis.
Rite Aid also has the option to purchase generic drugs that are sourced through an affiliate of Walgreens at a cost substantially equivalent to Walgreens for a period of ten years. The transaction has been approved by the boards of directors of both Rite Aid and Walgreens.
Some of our huge winners in the past have been well-known retail companies that have fallen on hard times. We believe Rite Aid will be another.
With a market cap of $2 billion, Rite Aid is in better shape today than a year ago, when Walgreens wanted to buy the company for $9.4 billion. We think Wall Street will finally discover Rite Aid when its stock price is significantly higher than its current attractive price.
John McCamant, The Medical Technology Stock Letter
Nektar Therapeutics (NKTR) had an incredible 2017 as its wholly-owned pipeline emerged on multiple fronts; in my view, the company is poised for a big 2018.
NKTR-181 delivered positive Phase III data and the company in agreement with the FDA will file for approval in April 2018. '181" is a less addictive opioid that can deliver pain relief without the buzz and is wholly-owned by Nektar.
The company is working on a corporate partner for further development and global commercialization of NKTR-181, so the year is likely to witness another significant deal.
Management recently stressed that partnership discussions are under way and that Nektar itself has morphed into an oncology company, hence the strategic decision to partner '181.
The company's track record of forming high value-added collaborations makes us believe a sizable deal for '181 is due in the near-term, especially now that the regulatory path/timeline has been defined. The accelerated approval timeframe for '181 appears to be a best-case and likely scenario for this compound.
After the very strong data at SITC, the NKTR-214/nivo novel combo has emerged as one of the leading I/O combos with differentiated, complementary and non-overlapping mechanisms of immune activations.
Importantly, the efficacy results demonstrate clinical activity in both PD-L1 negative and positive patients opening up the potential to treat the 70% of cancer patients who are PD-L1 negative.
In our view, '214 is emerging as an excellent immune-oncology candidate and has the potential to be the backbone drug in combo therapy through its ability to work in both PDL-1 + and negative tumor types.
With this very impressive '214 cancer data, Nektar now has two potential wholly-owned blockbuster drugs with '181 and '214.
Joe Duarte, In the Money Options
I'm not known for my patience when picking stocks. But once in a while a company comes along that begs for patience and even a momentum trader has to take notice.
In this case it happens to be the dog of the big pharmaceutical stocks, GlaxoSmithKline (GSK) ; this diversified pharmaceutical company used to be a big shot, but lately, it has been a doormat for the big insurers and their competition.
So why do I like Glaxo? Well, for one thing, nobody else seems to like it, which means that it's probably sold out. Furthermore, it's got a nifty 5.6% percent dividend yield, and no inclination to cut it at any time soon.
But what I really like is that Glaxo is returning to its roots -- medications for asthma and emphysema (COPD), two diseases that aren't going away, especially the latter as the population ages.
The FDA has recently approved its new shingles vaccine as well as Trelegy a combination treatment for COPD. Meanwhile, Nucala, an antibody-based injectable, is leading the market in severe asthma.
The company's multiple myeloma drug is making inroads in Europe and seems headed for FDA approval if Phase 3 study results pan out as the company expects.
Don't buy unless you've got the guts to handle it. I think it's a long shot, but if Glaxo SmithKline can continue to execute on its pipeline and deliver on its slow and steady strategy of getting it right with its meds instead of always getting it first, investors will slowly recognize the company's potential and money.
In that case, money will move into the stock with conviction. Meanwhile, receiving the stock's dividend yield is not a bad way to remain patient.
Nate Pile, Nate's Notes
Tekla Life Sciences Investors Fund (HQL) , a closed-end fund, invests in a number of publicly traded and privately held companies doing work in the life sciences area.
It is a fund that I recommend for investors who know they want to be in biotech but also recognize that they do not like the risk and volatility that so often come along with owning shares of individual companies in the sector.
Shareholders benefit from the fund's policy of paying out 2% of its net assets every quarter, along with gaining exposure to a wide variety of companies in the biotech space (both in terms of what sorts of products they are developing, but also in terms of market cap and stage of development) with a single purchase.
This payout is usually made in the form of new stock (i.e., it is essentially set up as a dividend reinvestment plan), though shareholders who would rather receive cash instead of stock can request it by contacting their brokerage firm.
Naturally, shares of this fund tend to track the major biotech averages fairly closely in terms of direction and momentum, but, as mentioned above, the swings are often not as volatile as biotech stocks.
Despite this lower volatility, I still encourage folks to build their positions with several small purchases on a regular basis rather than doing it all at once in one fell swoop. Tekla Life Sciences is considered a Strong Buy under $18 and a Buy under $22.
Chloe Lutts Jensen, Cabot Dividend Investor
Minnesota-based UnitedHealth Group (UNH) is the world's largest healthcare company and a top pick for conservative investors for 2018.
The company's primary business is still health insurance, but more recently it has diversified into pharmacy benefit management, running its own health centers, and providing healthcare-related services and technology.
UnitedHealth's vertical and horizontal integration give the company an advantage in delivering healthcare profitably. Its operating margins are a rock solid 7%, and the company's balance sheet is strong.
Revenue growth is high and steady -- revenues have increased in each of the past 10 years, by an average of 9% per year. Analysts expect EPS growth to hit 24% this year before returning to a closer-to-average rate of 8% in 2018.
Over the next five years, analysts expect EPS growth to average 15% per year. Most of that growth will come from the addition of new customers, as more people join Medicare and the company wins new Medicaid, military and corporate insurance contracts.
Thanks to its solid dividend history and 31% payout ratio, UnitedHealth earns a perfect Dividend Safety Rating of 10 out of 10 from our dividend stock rating system. The stock's Dividend Growth Rating of 9.0 is also excellent, reflecting UNH's recent dividend growth rate of 29%.
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