There are three sectors where you'll find me scooping up more large-cap stocks than any others right now. And it's no fluke.
For those of you who have viewed my free Market Outlook 2012 video series you know that Healthcare is one of my three favorite sectors. (If you'd like to view my complete Market Outlook series, there's still time to get it free. Go here now.)
Today, in this Special Report, we'll dive below the surface in this top sector and take a detailed look at its headlining stocks, deciphering the leaders from the laggards.
Why is the healthcare sector so red-hot? Simple. Pharmaceutical, biotech and other healthcare companies are the major beneficiaries of a seismic demographic shift: The first baby boomers (born in 1946) turned 65 in 2011. And remember there are more than 10,000 baby boomers turning 65 today and every day for the next 19 years! There's a total of 77 million of them that are going to need drugs to keep up with their active lifestyles..
It's no wonder according to the regulatory agency behind Medicare and Medicaid, healthcare spending is expected to grow by an average of 5.8% per year through 2020. And that's not all: The same agency also forecasts that healthcare spending will make up a whopping 20% of GDP in eight years.
So why I am only touting a six-month bullish outlook for this sector? This summer the Supreme Court will be announcing its decision regarding President Barack Obama's Patient Protection and Affordable Care Act (PPACA). All eyes will be watching to find out if the mandate for individuals to obtain government-approved health insurance or else pay a penalty is constitutional. The mandate is designed to essentially keep premiums in check so no one portion of the population is overpaying.
The punch line is that there are plenty of implications that come with this Act, which is why I will be watching closely for the Court's decision, which is expected in either June or July. The result could have a significant impact on the healthcare sector, so it's not to be ignored.
In the meantime there are plenty of great stocks for investors interested in this sector—as well as some stocks best avoided. This report will focus on six stocks in total: three pharmaceutical stocks, and three biotech stocks. Let's dive in…
Leader #1: Johnson & Johnson (JNJ) needs no introduction. The company has been around since 1886 and with the help of nearly 120,000 employees it produces some of the most recognizable brands in your bathroom (Think Band-Aid, Tylenol, Aveeno, Neutrogena and Listerine).
But its JNJ's pharmaceuticals that bring in the big money. Prescription or over-the-counter sales topped $24.4 billion in 2011, which was an 8.8% increase from 2010.
Continuing its history of estimate-beating results, JNJ once again surpassed analysts' expectations with its fourth-quarter earnings. Revenue rose just over 4% to $16.3 billion compared with $15.64 billion in the fourth quarter of 2010. Earnings jumped over 9%, resulting in a 3.7% earnings surprise.
Although they suffered another slump in U.S. sales, Johnson & Johnson made up for it with a surge of international revenue in the quarter. Global sales rose 3.9% overall, with increases in all worldwide segments.
My screening system rates JNJ an overall B, which is a solid BUY. It's been a steady-as-she-goes performer up 10% over the last 12 months—three times the S&P 500's performance. Plus, it pays out a nice 3.5% dividend.
Leader #2: Merck & Co. (MRK) is another company that has been has been providing health solutions and prescription medicines to people since the 1800s. Its pharmaceutical segment offers treatments for human bones, respiratory, immunology, cardiovascular, diabetes and other disorders.
MRK will release earnings on February 2. Analysts expect the company to post earnings of $0.95 per share on revenue of $12.53 billion. Six analysts have raised their outlooks for the company in the last month alone, which is typically a good omen for the stock.
My stock screens rate MRK an overall B, another solid BUY. The stock is up 17% over the last 12 months, and it has a 4.40% dividend yield.
It wasn't that long ago that Teva Pharmaceutical Industries (TEVA) was the darling of the pharmaceutical industry. The stock doubled from 2007 to 2010, but has since given nearly all of those gains back. The main reason for the declines is because of an industrywide "patent cliff" where scores of big-named drugs lost patent protection.
When generics can swoop in and offer patients cheaper alternatives to their prescriptions, the name-brand company suffers. This should have been TEVA's time to shine, but instead, in April of 2010, TEVA lost a huge battle with Pfizer over its blockbuster little blue pills that start with a V and rhyme with Niagara.
Speculation was mounting that Teva could produce a generic form, but the courts ruled that Pfizer's patent would be safe until October of 2019. That drug racks up more than a billion dollars a year in sales, which was a huge loss for TEVA as they were looking to diversify their drug arsenal.
TEVA will report earnings on February 15, and the analyst community expects earnings of $1.58 per share and revenue of $5.64 billion. That's a predicted 27.6% sales growth and 26.4% earnings growth, respectively. However, the company has struggled to show significant earnings or sales growth in recent quarters.
My stock screens rate TEVA an overall D, which is a sell. The stock has fallen 17% over the last 12 months—which means the S&P 500 alone has performed 5 times better than this stock. When an index fund can outpace an individual stock you know it's struggling. Steer clear of TEVA.
Leader #1: If you want to see a stock chart that will make your heart sing, look no further than Amgen Inc. (AMGN). The stock has been on a 40% run since the August 2011 lows thanks to strong operating margins, return on equity and revenue growth.
Amgen recently released fourth-quarter earnings that missed analysts' earnings estimates but showed a steady increase in sales. Revenue reached $3.97 billion, 3.4% higher than the previous year's $3.84 billion and higher than analysts' $3.92 billion estimate. Earnings per share came in at $1.22 per share, $0.01 lower than analysts' expectations. Both operating and profit margins shrank during the quarter.
Looking ahead the company is expected to post earnings of $1.46 per share on revenue of $3.95 billion for the current quarter. For the full-year it is expected to post earnings of $6.00 per share on full revenue of $16.2 billion.
My stock screens rate AMGN an overall A, which is a Strong BUY. The stock was upgraded from its B grade in November, just before the stock took off. Over the last 12 months the stock is up 25%. And AMGN does have a 2.10% dividend yield.
Leader #1: Gilead Sciences Inc. (GILD) is a biopharmaceutical company that discovers, develops and sells therapeutic treatments for life-threatening diseases worldwide. Its products provide treatment for major diseases such as HIV, hepatitis B, angina and macular degeneration. Major medicines include Atripla, Hepsera, Ranexa, Letairis and Tamiflu. Since its founding in 1987, Gilead Sciences have created clinical trials and effectively developed an arsenal of drugs that help manage some of the world's most deadly diseases.
Gilead is set to report its latest quarterly earnings on Feb. 2. Analysts are currently expecting the company to post earnings of $1.05 per share on revenue of $2.18 billion. Several analysts have actually increased their estimates in recent days, which is a good sign that the figures may prove even higher.
Over the last 12 months GILD stock is up 27%. My stock screens rate GILD an overall B, which is a solid BUY.
Not all biotechs are beauties. Human Genome Sciences Inc. (HGSI) stock looked like it took a leap off the high dive and landed in an empty pool. Splat.
And it's no surprise that the stock hasn't been able to find its way in this market.
Operating margins are at -317%, quarterly revenue growth is -33% and return on equity is -69%—are you kidding me?
Now, biotechs tend to put a lot of money into new drug development and therefore may see no real revenues for years. Once a drug gets approval and the company gets a partner to produce and distribute the drug that the money starts pouring in. So what's in the pipeline that will finally bring some money to HGSI?
There's BENLYSTA—in Phase 3 trials for lupus. Estimates show that about 16,000 new cases of Lupus are reported in the U.S. each year.
There's RAXIBACUMAB that is used to treat patients who have inhaled anthrax. Since it has so many government and security applications, its status is "in development."
And there are a handful of other drugs that could end up curing cancer, but they are far too early in their testing to be able to tell.
The bottom line is that this biotech is one you need to stay away from in the near term. My stock screens rate HGSI an F—that's a strong SELL. So while it may have some game-changing drugs in the works, at this moment, it's not a stock that's going to reward shareholders anytime soon.