Out of all the kinds of stocks you might invest in, healthcare stocks have been the second-best performing class of stocks over the past 50 years. And yet, in 2019, healthcare stocks lagged market averages, actually underperforming the broader S&P 500 by nearly 10 full percentage points.
Will 2020 be the year healthcare bounces back, and resumes trumping the market?
Maybe yes, maybe no. Given the durability of healthcare's outperformance -- a half century of beating the market -- it would appear healthcare has a built-in advantage over other kinds of stocks. In search of specific healthcare picks that could outperform in the new year, we've consulted TipRanks' Stock Screener and come up with a trio of picks that Evercore ISI analyst Vijay Kumar believes will outperform in 2020.
Baxter International (BAX)
Deerfield, Illinois-based Baxter International had a pretty good year in 2019, ending the year with its shares up 30%. Its numbers would have been even better, however, had Baxter not had to announce, in its Q3 report, that it was starting an internal investigation into its accounting for foreign exchange gains -- which revelation subtracted 12.5% from its market cap in a matter of weeks.
The plus side of this news for new investors, of course, is that Baxter's share price pullback has created "a nice entry point" into the stock, says Kumar.
Baxter's audit, says Kumar, "will be resolved in the very near term, and will not have an operational impact" on the company, which the analyst sees growing its earnings 11% this year. And after the audit is over, Kumar sees Baxter growing its revenues in the 5% to 6% range from 2021 through 2025 at least, with "EPS upside."
As a result, Kumar upgrades Baxter stock from "in line" (i.e. "hold") to "outperform" rating alongside a $94 price target, which implies nearly 9% upside from today's prices. (To watch Kumar's track record, click here)
And incidentally, this is the conservative position. Across Wall Street, buy ratings have outweighed hold ratings 3-to-1 over the past month (with no sells), and on average, Street analysts are forecasting a price target of $95.29 per share -- 11% above current prices. (See Baxter stock analysis on TipRanks)
Next up is PerkinElmer, a diagnostics and life sciences company based out of Waltham, Massachusetts. Priced at more than 47 times trailing earnings already, PerkinElmer isn't as much of a favorite on the Street, where most analysts see the stock not rising, but falling 2% or 3% over the next 12 months (consensus target: $96.33 per share). Regardless, this one is another of Kumar's favorite picks, winning an outperform rating and a $114 price target that sits 15% above today's prices.
Why does Kumar like it?
"We think PKI is massively underappreciated by the Street," comments Kumar, who thinks PerkinElmer is being unfairly punished for announcing a revenue guidance cut last year, even as it grew its operating profit margin by triple digits.
Placing a bet on President Trump's New Year's Eve announcement of a truce in the China trade war, Kumar sees upside to Chinese sales in 2020, and introducing new products that will create "potential upside to EPS" in the new year. Specifically, Kumar predicts that this year investors will see profits more than double at PerkinElmer, to perhaps $4.74 per share. Growth will then moderate into the 12% range (EPS: $5.33) in 2021 -- still better than average growth on the S&P 500.
And given that this is the second straight buy rating that PerkinElmer stock has received in the past month, it could be that other analysts are also starting to come around to this point of view. (See PerkinElmer stock analysis on TipRanks)
Varian Medical Systems (VAR)
Last but not least is Varian Medical Systems, a stock that with one notable exception (RBC Capital) has received nothing but "buy" ratings from Wall Street over the entirety of last year.
Surprise, surprise, Kumar likes this one as well.
Upgrading Varian to "outperform" with a $164 price target (nearly $20 above what the stock costs today, and about 10% higher than the Street consensus price target of $148.80), Kumar argues that Varian, which sells both medical devices and software products for cancer treatment, is entering a series of new product cycles that will drive 8% to 11% organic earnings growth, and potential total earnings growth in the "teens."
Here, as with PerkinElmer, Kumar sees China as a catalyst, combined with new products and "bundling" of products and services to drive sales. Based on these assumptions, the analyst is forecasting 12.5% sales growth for Varian in 2020, to $3.6 billion, followed by 8% growth to $3.9 billion in 2021. As if that weren't good enough already, the analyst is further forecasting that earnings per share will surge as much as 70% to $5.40 per share this year, and a still respectable 15% (to $6.21 per share) next year.
With numbers like these, Kumar considers Varian a "best in class" business and a "top pick" in the healthcare sector.
To find good ideas for healthcare stocks trading at fair value or better, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.