Investing in Healthcare Stocks for Beginners

Now that the world has one foot in and one foot out of a pandemic that affected nearly every aspect of life on Earth for more than a year, the healthcare sector has been hogging the spotlight for quite some time. From life-saving vaccines to artificial intelligence, the modern healthcare sector offers something for every investor — but how much do you really know about this huge and profitable segment of the economy?

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To help readers prepare before they take the plunge into healthcare-sector investing, GOBankingRates developed this guide.

Healthcare Stock Investing for Beginners

A sector is a loosely defined term for a part of the economy where businesses share a common product, service, or theme. A sprawling fund like the Vanguard Total Stock Market ETF (VTI) will buy you into several different sectors at the same time, but if you think one is set to outperform the rest, you can target that one sector specifically — in this case, healthcare.

Healthcare stocks fall into two broad categories:

• Healthcare equipment and supply manufacturers or service providers: These healthcare companies design, produce, market, and distribute healthcare products, but they’re also providers of healthcare services and owners of healthcare facilities and organizations. According to StockNews, stocks in this category are poised to soar between now and 2025 thanks to a crush of new demand from all the medical procedures that were put off in 2020. Among the hottest stocks in this category are ResMed, Inc. (RMD), IDEXX Laboratories (IDXX), and Hologic, Inc. (HOLX).

• Pharmaceutical and biotechnology companies: These companies research, develop, produce and market drugs, treatments, and other healthcare products. Unlike the other category, many of these healthcare stocks are household names. They include Johnson & Johnson (JNJ), Pfizer (PFE), and Regeneron (REGN).

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Best Healthcare Stocks or ETFs to Invest In

Before the pandemic, investors in the healthcare sector had gotten used to beating the market as legions of aging baby boomers sent demand soaring and exciting new technologies drove innovation and discovery. The virus stirred the pot, however, and although the sector is doing well, it’s down in 2021 compared the benchmark index — it gained 9.67%, year to date, compared to 12.93% for the S&P 500.

Over the last full year, the spread has been even wider. Investors who bet on the healthcare sector at the end of June 2020 would have earned hefty gains of 24.11%. Those who socked away their cash in an ETF that mirrored the S&P 500, on the other hand, would have realized much more impressive returns of nearly 37%.

No one knows what the second half of 2021 will hold, but the Motley Fool is not shy about which healthcare stocks it likes for the bottom half of the year:

• Vertex Pharmaceuticals (VRTX): This is one of the hottest and most promising biotech companies in the sector

• UnitedHealth Group (UNH): The largest health insurer in the world, this huge, stable company is also an excellent dividend stock

• Teladoc Health (TDOC): The pandemic-driven shift toward remote healthcare doesn’t appear to be going anywhere, and Teladoc is the leader in the industry

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More Best Healthcare Stock Recommendations

Broad-based healthcare sector ETFs or mutual funds are less risky than choosing individual stocks. You might want to look at low-cost healthcare sector ETFs, which can give you exposure to the sector for a low expense ratio. If you decide to invest in an individual healthcare stock or two, you might want to look at companies that are well-established household names.

Here’s a look at a few of the picks that the pros are recommending:

In addition to predictions that some specific healthcare stocks will do well in 2021, other reasons to invest in healthcare stocks include an improving economy, pent-up demand for medical procedures that were put off during the pandemic, and the legions of new coronavirus survivors who have lingering effects from their brush with the illness.

But before going all-in on a healthcare stock, make sure you’re following the best investing practices.

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How to Invest Money in Healthcare Stocks: Best (and Worst) Practices

Stocks have price tags just like other products and services. One of the most important tools for valuing a company is by looking at its price-earnings (P/E) ratio, the ratio of a company’s share price to earnings per share.

Use the P/E Ratio

The P/E ratio looks at a company or sector’s price and divides it by its one-year earnings to come up with a number. Now, in and of itself, the P/E ratio doesn’t tell you much. But if you compare it to the historical sector P/E, you get an idea of whether a sector or stock is over or undervalued.

Currently, the healthcare sector’s P/E ratio is 23.7, not far off from where it was throughout the pandemic and the year before in 2019, according to Macrotrends. Throughout much of 2018, the sector’s P/E ratio was in the 40s. It was in the 80s in 2015 after peaking above 150 in 2014. As you can see, investors today are paying far less for every dollar of earnings than investors in the industry were just a few years ago.

Investigate Healthcare Stocks Thoroughly

The best practice for investing in healthcare stocks is to perform a thorough investigation of the healthcare sector environment. Just remember that before buying a healthcare stock, you need to do a bit of stock research to make certain you’re buying a sound company at a good price. Resources for stock and ETF research include Morningstar, Kiplinger, and the individual companies’ websites.

Allocate Appropriately

And here’s one last rule of thumb: To avoid risk, your stock portfolio shouldn’t be concentrated solely on healthcare stocks. “In a diversified portfolio that includes all the major asset classes, one goal is to avoid an over-allocation to any specific asset class or sector,” said Daniel Zajac, a certified financial planner, certified public accountant, and founder of ZajacGroup, a family-owned-and-staffed boutique wealth management firm.

“With that said, sector funds — in this case, healthcare — might be a fit as a small piece of the overall portfolio for investors with an appropriate appetite for risk,” Zajac said.

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Barbara Friedberg contributed to the reporting for this article.

Last updated: July 13, 2021

This article originally appeared on GOBankingRates.com: Investing in Healthcare Stocks for Beginners