Healthcare stocks beat the S&P 500 index in performance over the last two years. That's not the case so far in 2019, but don't expect this underperformance to last for too long. Many healthcare stocks should be solid winners over the long run.
We asked three Motley Fool contributors to identify healthcare stocks they think are great picks to buy in May. They chose Exact Sciences (NASDAQ: EXAS), Emergent BioSolutions (NYSE: EBS), and Teladoc Health (NYSE: TDOC). Here's why these three stand out.
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Curing cancer by catching it sooner
Todd Campbell (Exact Sciences): Colon cancer is the second-leading cause of cancer death even though survival rates are high if it's diagnosed early on. Although guidelines recommend everyone between the ages of 50 and 85 be screened regularly for colorectal cancer, many people aren't up-to-date on their screening because of the cost and prep regimen associated with a colonoscopy.
In a bid to improve screening rates, Exact Sciences launched Cologuard in 2014 as an alternative to a colonoscopy. It's a noninvasive test: Patients simply collect and ship a stool sample to a lab for evaluation. Cologuard screened 934,000 people and pocketed $454 million in revenue in 2018. And in Q1 2019, 334,000 people were screened with Cologuard, resulting in revenue of $162 million, up 79% from the year prior.
Recently, Exact Sciences shares have slipped on worries that demand for Cologuard will eventually be replaced by a blood test, or liquid biopsy. Liquid biopsies are already helping doctors use genomics to inform cancer treatment, but we're still likely years away from data proving its value in colorectal cancer screening. Furthermore, Exact Sciences is expected to unveil data soon for a next-generation Cologuard that could improve cancer detection, making it more difficult for liquid biopsy to match its sensitivity.
Exact Sciences only has single-digit market share in what it values at a $14 billion per year market. It will be a while before we know if liquid biopsies work in screening for colorectal cancer. Because of these two factors, I think buying shares following its recent drop could be a smart move.
Sometimes, the best time to buy is when the news is bad
Chuck Saletta (Emergent BioSolutions): Emergent BioSolutions saw its shares get shellacked recently after it delivered disappointing earnings results and guided the near term downward. As painful as that move was to shareholders who owned the company before the news hit, the decline might very well be just what those sitting on the sidelines need to consider taking the plunge to invest.
After the decline, Emergent BioSolutions sported a price around $48.12. Despite the short-term pain the company is projecting, analysts anticipate it will earn around $3.33 per share in 2020. That means its ratio of price to anticipated forward earnings is less than 15 -- making it reasonably priced for investors who have the patience to wait out the short-term pain.
Of course, any estimates are based on projections, and it's possible that Emergent BioSolutions won't deliver on those expectations. Still, with a combination of existing products, a decent government contract to work on terror countermeasures, and a pipeline that ranges from pre-clinical to phase 3 testing, there's a good chance it will.
Even if it doesn't deliver phenomenal earnings in the near term, Emergent BioSolutions sports a decent balance sheet, with a debt-to-equity ratio below 0.8 and a current ratio above 3.0. That gives investors reason to believe that even if the recovery takes a bit longer than expected, the company still has the financial strength and stability to see it through.
Every so often, the market's short-term jitters give investors with a longer-term focus the opportunity to buy a company at a decent price. Thanks to the market's concerns with Emergent BioSolutions, now just may be one of those opportunities.
The king of virtual care
Keith Speights (Teladoc Health): There are plenty of healthcare stocks with great opportunities. Only a few, though, have a commanding presence in their respective markets. Teladoc Health is definitely one of them.
Teladoc reigns as the king of virtual care. The company provides telehealth services to more than 12,000 clients, including roughly 40% of the Fortune 500. Last year, over 2.5 million healthcare visits were conducted virtually -- through video calls via internet apps or phone calls -- on Teladoc Health's platform.
And the company operates globally, delivering virtual care in 130 countries and in more than 30 different languages. This is an important differentiator for Teladoc Health because of the strong international demand for telehealth services.
CEO Jason Gorevic mentioned in the company's Q1 conference call that the Centers for Medicare and Medicaid Services "is very much behind the inclusion of telemedicine to increase accessibility to medical care and to lower costs." That's not surprising. Telehealth is likely to become increasingly important as both private and government payers search for ways to control escalating healthcare costs.
Some healthcare stocks could have iffy prospects if the U.S. moves to a single-payer system as some presidential candidates would prefer. I think Teladoc Health should succeed even if that happens. But the company should also enjoy strong growth if not. To me, Teladoc is a win-win kind of healthcare stock that's a great pick right now.
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Chuck Saletta has no position in any of the stocks mentioned. Keith Speights and Todd Campbell own shares of Teladoc Health. The Motley Fool owns shares of and recommends Emergent BioSolutions and Teladoc Health. The Motley Fool has a disclosure policy.