With the healthcare sector growing significantly over last year, Maxim Manturov, Head of Investment Research at Freedom Finance Europe, outlines why eHealth/Healthcare stocks should be on your portfolio this year.
“The Covid pandemic has had a huge impact on a number of sectors but none more so than healthcare, which has led many organisations in the industry to grow significantly over the last 18 months. This growth has provided a golden opportunity for retail investors to maximize their portfolio by looking to invest in the eHealth/Healthcare industry. But before choosing to invest, its integral to do your due diligence. This means understanding what you need to look for in healthcare stocks, what are some of the risks in investing in this sector and most importantly, what are the best stocks to buy.”, explains Maxim Manturov, Head of Investment Research at Freedom Finance Europe.
What to look for in healthcare stocks
Growth potential: “How much the company may grow will be one of the most important points to consider, as this will directly impact the stock price moving forward. In particular, you should check how quickly the organisations earnings grew over the last few years. We all know that past performance is no guarantee of the future results, but in case a company did not boost its earnings previously, it is unlikely to happen in the future. Take a look at the company presentations that target investors in order to see what kind of strategy they have and how large their potential market is. Check the competition as well in order to compare the strategies.
Financial performance: “Analyse the company's financial reports, as they may help you assess its stability or sustainability. Ideally, the company should be already profitable; if not, make sure it knows how to become profitable in the foreseeable term. You should also check how much money the company has, which also includes equivalents and short-term investments. This may be found in the quarterly or yearly reports. Of course, the more money they have, the better (you would think the same of your current account balance, savings, etc.). Free cash flow, or FCF, is also a very important indicator of the company's financial position; this is the total funds left after operating, and capital spending. Again, the larger the FCF, the better the position.
Ratios: “There are a lot of ratios to look for to make sure the stock price you pay is really worth it. The most popular ratio is price to earnings (P/E), which measures the stock price against the earnings per share. There are such variations of this ratio that measure past performance, e.g. 12 months, as well as forward P/E's that show the expected result for the 12 months to come; the latter may be most useful to measure fast-growing healthcare stocks. You can also compare the P/E with that of other stocks in the same industry, which will allow you to see whether the stock in question is underpriced or overpriced. In case the P/E for a particular company is higher than that of any competition, this does not necessarily mean the stock is not worth buying: perhaps, on the contrary, it has more potential than any other company in the industry.
“The price/earnings to growth ratio, or the PEG, is another important metric; it measures the expected growth, as a rule, in five years. Stocks with low PEG (especially less than 1.00) would constitute a better purchase than those with a higher PEG.
Dividends: “With some healthcare stocks, the investors get dividends, i.e. a fraction of the company's profit. Dividends can increase the total return you receive from owning a stock. The dividend yield shows the percentage of the current share price related to annual dividend payout. There is also a ratio that measures dividends as a percentage of company earnings and shows how much of the company's cash is used to cover dividends. The lower the payout ratio, the higher the likelihood that the company will be able to continue paying dividends, going forward.”
The risks of investing in healthcare stocks
“Investing in any type of stock carries risks, as the competition may create products or services that will be more successful in the market. For healthcare, there are some more industry specific risks, too. For instance, as healthcare is heavily regulated, drug producers and medical device manufacturers may not obtain the necessary licenses or approvals to market new products, while regulatory changes could radically change the growth potential for any healthcare stock.
“Many healthcare companies also face a serious risk of litigation. For example, biopharma companies, medical device manufacturers, and healthcare providers can be held liable if patients believe that the products and services have damaged their health. In addition, healthcare companies need to convince health insurance companies and government agencies to pay for their products. In case they fail to obtain reimbursement approvals, their growth potential may sink.”