Healthcare stocks went on a wild ride in 2020, thanks to the global pandemic. And even today, companies at the forefront of the vaccine effort are seeing their valuations fluctuate all over the place.
Investing in healthcare, however, is one of the most challenging forms of investment. Not only is it a complex sector, like technology, but it’s also subject to massive government regulation and oversight.
The result is a dangerous environment for investors. When a treatment works, the payoffs are tremendous. But many stocks fail to perform at all, leaving you completely out of pocket.
Value Healthcare Stocks
Value healthcare stocks are usually the old stalwarts of the industry. These are companies with large product portfolios and established relationships with front-end providers. They create drugs, diagnostic equipment, and tools proven to work.
Usually, these stocks have a low price-to-earnings ratio, putting them in the value category. Investors don’t expect them to grow much in the future. But they do foresee continued sales and profits at the current, moderate pace.
Professionals involved in healthcare capital management love these kinds of stocks because they allow investors to put their money into the industry without exposing themselves to substantial risks. In value healthcare stocks, the price of shares is low relative to the earnings they produce. So investors pay less for slices of the dividend.
COVID may have benefited value healthcare stocks in the long-run by increasing the size of the sector. Very few value stocks are involved in efforts to directly combat the disease. But most sell products that healthcare systems require to continue functioning at a high level.
Growth Healthcare Stocks
Some investors will want to consider investing in fast-growing healthcare stocks.
People typically judge a “growth stock” by its most recent quarterly earnings per share growth rate.
Some healthcare companies can see growth in the thousands of percent, year-on-year, especially if they’re young.
For instance, Insulet Corp is a company that develops automatic insulin injection systems for people with diabetes. Its EPS growth was more than 1,600% last year, massively outstripping the rest of the industry.
Growth stocks are more volatile than value healthcare stocks. So when you buy them, you’re taking a risk. However, the rewards can be massive. You could increase your initial investment 100 or 1,000 times over.
Momentum Health Stocks
Investors will also sometimes talk about momentum health stocks in light of COVID-19. These are stocks that have seen their 12-month trailing total return skyrocket.
Moderna, for instance, is currently in this category. That’s because it is heavily involved in the type of messenger RNA vaccines governments are buying to fight off COVID-19. Other companies in this segment include Teladoc Health which makes diagnostic devices and prescribes medications via online portals.
Investors look for momentum because it indicates that a stock is likely to continue performing well in the future. So choosing these as part of your portfolio might be something you consider.
When choosing healthcare stocks, always consult experts. Unless you know what you’re doing, don’t go it alone.
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