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Top healthcare stocks: Is healthcare the ultimate defensive play?

By Fitri Wulandari

Edited by Jekaterina Drozdovica

10:50, 29 June 2022

Top healthcare stocks: Is healthcare the ultimate defensive play? The concept of medical technology.
Top healthcare stocks: Is healthcare the ultimate defensive play? Photo: metamorworks / Shutterstock.com

Healthcare sector stocks have been resilient during market downturns. 

Shares in major pharmaceutical companies and healthcare-related services have outperformed slumping US stock markets battered by tight monetary policy and recession risks. 

As of 27 June, the S&P 500 Healthcare index has enjoyed a one-year return of 3.17% and annualised three-year return of 12.28%, outperforming the broader S&P 500 index (US500), which has lost 8.89% in a year and delivered a 10.07% annualised three-year return, according to data from S&P Global.

Are healthcare stocks the ultimate defensive play during a recession? Here we discuss what factors drive the sector’s solid performance, note healthcare stocks to watch, and consider the risks and opportunities when investing in healthcare stocks.

S&P 500 vs S&P 500 Healthcare, 2017 - 2022

Outperforming market

The healthcare sector is broad and includes many different types of stocks. Key categories are pharmaceuticals and biotechnology, which produce drugs to prevent and treat diseases; medical services providers, such as hospitals, home-care medical service providers and clinics; and health insurers.

Healthcare companies are among so-called defensive stocks. This means that a company is able to consistently pay dividends and is largely unaffected by market volatility. The company’s business strategy, the goods and services it offers, and the potency of its brand all contribute to its stability.

Data from Goldman Sachs showed that healthcare stocks have been major market outperformers during times of recession. For example, during the financial crisis in 2008 and 2009, the healthcare sector’s earnings per share (EPS) declined by an average 13%. Drug and groceries stores slumped 25%. The auto sector recorded the biggest decline of 92%.

 

During the Covid-19 pandemic in 2020, the healthcare sector’s EPS dropped 3% – the smallest decline compared to other sectors. Energy, the biggest faller, lost 62%. The auto sector dropped 57%. Both sectors were hit by Covid-19 restrictions that slowed businesses and travel. 

“People still need healthcare and drugs, etc. So this is an area that can be much more resilient to market falls and outperform the growth stocks that had done so well in a bull market,” said David Jones, Capital.com’s chief market strategist.

In 2021, large-cap healthcare and tech stock outperformance helped the Russell Index 1000 (US1000) surpass its peers, according to the Russell Index’s fourth quarter report. 

Investment management firm BlackRock noted that solid performance in healthcare sectors was still dominated by Covid-19 beneficiaries. Pharmaceutical companies such as Pfizer (PFE), Eli Lilly (LLY), and Johnson & Johnson (JNJ) benefited from approval of their Covid-19 vaccines and antibody treatments. 

Medical devices and supplies companies producing Covid-19 diagnostic and testing kits also posted strong returns, the company added. 

Rebounding medical spending

Another factor that drove strong performance in healthcare stocks was rebounding medical spending in 2021 as families who deferred medical treatments during the peak of the pandemic started to return.

According to JP Morgan Chase research, overall healthcare spending in dollar terms increased by 23% in 2021 to $1,350 per family from $1,100 in 2019 to 2020.

“For the bulk of the pandemic, fewer families incurred healthcare spending, at higher rates of cost per visit, perhaps indicating that people avoided interacting with healthcare facilities for minor, lower-cost issues, such as routine procedures or check-ups,” the research paper said.
“That deferral of care may continue to drive increases in healthcare spending beyond 2021, as families return to pre-pandemic behaviours.”

Debasmita Chatterjee, a Zacks Investment Research’s analyst in India, said that healthcare companies were likely to benefit from several factors, including rebounding patient volumes in the first quarter of 2022. 

“Revenues of healthcare stocks are likely to have gained from improvement in-patient admissions and outpatient visits in the first quarter,” Chatterjee said in a note published on 5 May.
“Large-scale vaccination programs undertaken worldwide have made people who were previously apprehensive of contracting the infection more optimistic about hospital visits. A rise in admissions bodes well as they contribute significantly to a hospital’s top-line growth.”

In the first quarter of 2022, 80.3% of companies on the S&P 500 surpassed EPS expectations, exceeding 78% for the overall index, according to S&P Global data. The healthcare sector posted 15.6% revenue growth in the first quarter of 2022 year-on-year, beating overall S&P 500 revenue growth of 13.5%.

Five top healthcare stocks in S&P 500

With the sector outperforming the wider market, how can investors gain exposure to it? One way of looking for healthcare stocks to invest in could be searching for bellwether industry names, focusing on the top healthcare companies. 

Below we take a look at the biggest healthcare stocks by market capitalisation on the S&P 500. 

Johnson & Johnson

Johnson & Johnson (JNJ) is a global healthcare company. It operates three business segments: pharmaceutical, medical devices and consumer health.

The company is the largest healthcare company on the S&P 500 Healthcare index, with a market capitalisation of $479.68bn, as of 28 June. It is the world’s biggest pharma company by market cap.

The New Jersey-based healthcare giant is well-known for its leading consumer health brands, like Band-Aid, Neutrogena and Listerine.

Johnson & Johnson’s pharmaceutical segment produces a broad range of drugs for treating and preventing immunological illness, infectious diseases, such as HIV/AIDS and Covid-19, various types of cancers, pulmonary hypertension and more.

Its medical devices segment manufactures products used in interventional solutions, orthopaedics, surgery and vision. 

In November 2021, the company announced plans to spin off its consumer health business, creating two independent companies. The new consumer health division will manage four $1bn megabrands and 20 brands worth over $150m. It’s expected to complete the change in 18 to 24 months.

The company’s latest dividend payment on 7 June 2022 marked its 60 consecutive year of dividend payment.

Johnson & Johnson stock price, 2017 - 2022

UnitedHealth Group

UnitedHealth Group (UNH) is the world’s largest insurance company by market capitalisation, as of 28 June. It ranks second in the S&P 500 Healthcare index, with a market capitalisation of $464.99bn.

Despite Covid-19 restrictions causing many businesses to downsize or close, leading to a drop in the renewal and enrollment of health coverage from individual and corporate clients, UNH stock rose by19.29% in 2020 and 43.19% in 2021.

The company operates UnitedHealthcare and Optum. UnitedHealthcare offers a wide range of health insurance plans for individuals, employers, older adults and disadvantaged people. 

The Minneapolis-based insurer is the largest insurance company in the US with 12% market share in 2022, according to research firm ValuePenguin.

With a strong market position and solid balance sheet, UnitedHealth Group has consistently delivered dividends to shareholders since 1990.

United Health Group stock price, 2017 - 2022

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Eli Lilly and Company

Eli Lilly (LLY) is one of many healthcare companies that have weathered the stock market sell-off.

The world’s third largest pharmaceutical company by market capitalisation has a solid line-up of top selling therapies that fuel its earnings. It also has promising treatment candidates that can replace older drugs as their patent rights expire and sales fall. The pipeline would ensure the company’s future growth. 

Eli Lilly's three top selling drugs are diabetes treatment Trulicity, Covid-19 antibody Bamlanivimab and cancer drug Verzenio. The company has received approval from the US Food and Drugs Administration (FDA) for its Mounjaro’s (tirzepatide) injection, a treatment for adults with type 2 diabetes and Olumiant (baricitinib), a treatment for certain hospitalised Covid-19 adult patients. 

Founded in 1876 by American soldier and pharmacist Colonel Eli Lilly, the company has delivered returns of 17.95% year-to-date and 42.91% in the past year, as of 28 June. 

The company has outperformed the S&P Healthcare index, which posted year-to-date losses of 8.33% and a 3.11% return in the past year.

Eli Lilly stock price, 2017 - 2022

Pfizer Inc

Pfizer Inc (PFE) is a global pharmaceutical company that researches, develops, manufactures, and markets prescription medicines and vaccines. 

Headquartered in New York, the world’s fourth largest pharmaceutical company has a diverse range of treatments, including Viagra (sildenafil citrate) to treat erectile dysfunction, Lipitor for lowering cholesterol in the blood, and Covid-19 vaccine Corminaty.

In 2021, Corminaty became the year’s best-selling drug, with the US government and healthcare system spending $36.9bn on it, according to Nature. Corminaty’s stellar sales brought Pfizer to the list of top pharmaceutical companies, with shares gaining about 60% in 2021. 

Unlike its pharma peers, Pfizer’s stock has been volatile in the past two years. The price slipped nearly 1% in 2020 despite its Covid-19 vaccine being the first to receive Emergency Use Authorisation from the FDA. 

The stock surged 60% the following year, propelled by stellar sales of its Corminaty Covid-19 vaccine. The share price has dropped 18.39% year-to-date and 26.50% in a year, as of 28 June. 

Despite its volatile performance, the company is among dividend stocks. It has paid quarterly dividends consecutively since 1980.

Pfizer stock price, 2017 - 2022

AbbVie Inc

AbbVie (ABBV) is a research-based pharmaceutical company that produces medicines to treat autoimmune diseases, cancers, viruses (including hepatitis C and HIV), neurological and metabolic disorders.

The Illinois-based firm was founded in 2013 when Abbott Laboratories split into two publicly traded companies. Abbott Laboratories specialises in medical equipment and devices and nutritional products. AbbVie became a research-driven pharmaceutical manufacturer.

While the company has been operating for less than a decade, it has delivered earnings that have consistently beat estimates, except for the fourth quarter of 2013 and the fourth quarter of 2018, according to data from MarketBeat.

The main products of the world’s fifth largest pharma company are Humira for the treatment of rheumatoid arthritis and Imbruvica for cancer. Humira accounted for nearly 35% of AbbVie’s global revenue in the first quarter of 2022, followed by Imbruvica at 8.66%.

AbbVie stock price, 2017 - 2022

Risks, opportunities and analyst outlook

With the Covid-19 pandemic gradually reduced and healthcare challenges changed, what are the risks and opportunities for those looking to invest in healthcare stocks?

Swiss investment bank UBS suggested in its second-half outlook that investors could add defensive and quality stocks, such as healthcare companies, to manage risk in the event of a more significant slowdown in economic activity. 

“By adding exposure to parts of the market less sensitive to the economic cycle, including healthcare, quality-oriented stocks, and resilient credits, investors can improve the resilience of their portfolios,” UBS wrote in the report.

“The pharmaceutical part of the healthcare sector is traditionally relatively resilient to periods of slower economic growth or risk-off moves,” UBS said, adding that global healthcare has, on average, outperformed global stocks by more than 6%.

Elsewhere, investment advisory firm Hartfordfunds had a more positive outlook for the healthcare sector this year due to a slew of tailwinds for the healthcare subsectors – biopharma, medical technology and healthcare services, noting:

“Breakthrough innovation in cancer treatments, immunology, and some rare diseases is creating a wealth of opportunities for professional investors in the biopharma industry.”

“Key medical-technology companies are also aiding considerable drug research and benefiting from increased spending and the proliferation of new drug prospects.”

For healthcare services, the Covid-19 pandemic has brought behaviour changes as consumers become less reliant on hospitals and embrace less costly healthcare delivery, such as telehealth and home health. 

“We believe healthcare-service companies are well positioned to help solve one of the greatest societal challenges we face for the future: rising healthcare costs,” it added.

Investment management firm BlackRock said in its Global Healthcare Outlook 2022 that it remained cautious on investing in Covid-19 beneficiaries as the emergence of the Omicron variant and preliminary results suggested a decline in its severity. In addition, highly effective treatments for the virus are available.

“We worry about the sustainability of those closely tied to Covid-19 revenue sources, as additional competition seeks to enter this market in year three of the pandemic. Additionally, we view the potential of future variants as a risk to the normalisation of sentiment in the healthcare sector,” the investment management company wrote.

BlackRock suggested that biotechnology firms, especially small and mid-cap corporations, offered attractive opportunities. 

“However, we remain attentive to shifts in sentiment as a result of the continuing pandemic. Longer-term, the secular growth drivers supporting healthcare demand continue,” BlackRock said.

The company forecast the number of persons aged 80 years or over to triple, from 143 million in 2019 to 426 million in 2050. 

“These changing demographics provide long-term secular demand and growth for healthcare products and services for decades to come,” BlackRock concluded.

Final thoughts

Whether healthcare stocks are a suitable investment for you should depend on your own objectives. Remember, it’s important to reach your own conclusions about the stocks and its likelihood of achieving targets.

When looking at healthcare stocks to buy, remember that analysts can be wrong. Their projections are based on fundamental and technical analysis. Past performance does not guarantee future results.

Conduct your own research, and keep in mind that your decision to invest should be based on your risk tolerance, market knowledge, your portfolio size, goals and timeframe. Never trade money that you cannot afford to lose.

FAQs

Are healthcare stocks defensive?

Yes. Healthcare stocks are classified as defensive stocks. A stock is considered to be defensive when a company is able to consistently pay dividends and is largely unaffected by market volatility.

What are the best medical stocks to invest in?

Determining the best healthcare stock to buy depends on your own investment objectives. Keep in mind that it’s important to reach your own conclusions about a stock and its likelihood of achieving analysts targets.

Are healthcare stocks a good investment?

Whether healthcare stocks are a suitable investment for you depends on your investment goals and timeframe, risk tolerance, experience in the markets. It is important to do your own research about healthcare stocks by reading news, analyst reports, companies’ balance sheets and other reliable information. Never invest money you cannot afford to lose.

Markets in this article

ABBV
AbbVie
175.68 USD
6.5 +3.850%
LLY
Eli Lilly
906.46 USD
-35.83 -3.810%
JNJ
Johnson & Johnson (Extended Hours)
156.81 USD
5.7 +3.780%
PFE
Pfizer Inc (Extended Hours)
30.09 USD
0.51 +1.730%
US500
US 500
5596.2 USD
-71.6 -1.260%

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