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FinanceInvestors Guide

The 4 Best Biotech and Health Care Stocks to Buy for 2018

By
Sy Mukherjee
Sy Mukherjee
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By
Sy Mukherjee
Sy Mukherjee
Down Arrow Button Icon
December 7, 2017, 6:30 AM ET

Turmoil over Obamacare hasn’t dimmed the outlook for most health care stocks.

As far as industries go, few are quite as complex, multifaceted, and, as T. Rowe Price Health Sciences fund portfolio manager Ziad Bakri puts it, “idiosyncratic” as health care. The sector spans the gamut from drugs and devices that can produce biological miracles to the actuarial business of insurance. Oh, and it just happens to be one of the nation’s most-battered political piñatas.

Yet for all its complexity, and all the flak surrounding the fate of the Affordable Care Act, financial experts see health care as a sector with strong prospects for 2018. Analysts expect earnings in the sector to rise a stunning 24% next year, with an assist from promising tech. But price/earnings ratios for health care stocks are among the lowest in the S&P 500.

Securing a healthy return over the next year will mean choosing carefully among health subsectors. Pharmaceuticals and biotech could be smart bets, as could insurers, Bakri says. Hospitals, in contrast, will face some growing pains as they face more pressure from payers to lower costs.

Here are four stocks that look particularly promising.

Biotech

During and after his presidential campaign, Donald Trump bashed biopharma over high drug prices and extravagant price hikes. And it wasn’t long ago that biotech stocks would lose billions in market value every time he spoke out on the issue (such as when he said Big Pharma was “getting away with murder” in January).

Those days are pretty much gone. “The things the administration is focusing on to tackle drug prices are actually things that are good for the industry,” says Brad Loncar, an investor who manages a biotech fund focused on cancer immunotherapy drugs. Loncar notes that the White House and Food and Drug Administration commissioner Scott Gottlieb have been pushing for initiatives to speed drug approvals and cut red tape at the FDA.

In this environment, nimble companies developing new technologies may have an advantage over the bigger, better-known names that are trying to eke every penny out of legacy products, says Loncar. “It’s a good time for smaller companies. That’s where the innovation is right now.”

Nic Rapp
Nic Rapp

Both Loncar and Bakri see huge opportunities for firms on the cusp of FDA approvals in spaces like gene therapy. Bakri points to Alnylam Pharmaceuticals (ALNY), whose shares have risen an absurd 259% this year thanks to promising clinical trial results for its experimental drug patisiran, which is being tested to treat hereditary ATTR amyloidosis, a rare neurodegenerative disease. But in the long term, the company’s bigger promise could be its underlying technology platform: “RNA interference,” in which certain kinds of gene expressions can be “silenced” to potentially treat all kinds of genetic diseases.

Then there’s Sage Therapeutics (SAGE) (up 81% on the year), which may become the first company to market with a drug for postpartum depression, called brexanolone. That condition afflicts between 10% and 20% of women who give birth in the U.S., and late-stage trials indicate it’s both fast-acting and long-lasting.

Insurance

Obamacare has been on a roller coaster for nearly a decade, convincing some investors to stay far away from insurance companies in the short term.

But the overall health insurance sector encompasses private, public, and privately managed public programs across individual, small group, and large group markets—many of which have nothing to do with Obamacare. Bakri says companies like Humana are well-positioned for growth as the managed care market continues to blossom. But the best bet, he says, is titan UnitedHealth Group (UNH): “It’s extremely diversified, it has its fingers in businesses like Medicare Advantage and managed care.”

UnitedHealth Group’s market value has ballooned 41% this year, and 296% over the past five, thanks in part to savvy acquisitions. But analysts who follow the company expect an average 13.5% earnings growth rate for the firm over the next five years, meaning it still has room to grow.

Devices

Fortune earlier this year launched its “Future 50,” which homed in on the companies poised for explosive growth. Intuitive Surgical (ISRG), the runaway market leader in robotic-assisted surgery, was high on the list for its rapid (and ongoing) product adoption boom. (Some 753,000 procedures were performed with its da Vinci robotic surgery devices in 2016 alone, according to the company.)

The potential that the firm’s tech will be involved in an increasing number of procedure types in a growing number of countries is one reason it’s been lauded by analysts and investors, including both Bakri and Morgan Stanley’s David Lewis. A new generation of surgeons has embraced the technology—which allows doctors to perform surgeries without having to slice open patients, via a futuristic console that controls the da Vinci’s various arms. Lewis told Fortune that a prominent medical conference that was skeptical of the technology just five years ago had now been taken over by young surgeons sharing their research on use of the robots.

Intuitive seems to think it has plenty of room to grow too. The company’s stock had surpassed $1,100 before a three-for-one stock split took effect in October that made its shares more accessible. Analysts like Lewis expect earnings to continue their hot streak thanks to Intuitive’s existing—and expanding—market clout and a business model where 71% of sales are recurring in nature (thanks in part to the firm’s growing arsenal of accessories).

Here are more of our picks for 2018:

  • All-Tech Investing: The 31 Best Stocks to Buy for 2018 Instead of Apple or Tesla
  • 4 Best Tech Stocks to Buy for 2018—Instead of Buying Bitcoin
  • The 5 Best Fintech Stocks to Buy for 2018
  • Why McDonald’s Is One of the 3 Best E-commerce Stocks to Buy for 2018
  • The 5 Best Emerging Markets Stocks for 2018: How to Buy the Amazon and Google of China
  • The 6 Best Stocks to Buy for 2018 Before Robots Take Your Job

A version of this article appears in the Dec. 15, 2017 issue of Fortune, as part of the article “Investor’s Guide 2018 — Stocks and Funds: The All-Tech Portfolio.”

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