Returns as of 01/08/2022
Returns as of 01/08/2022
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Healthcare can be a wonderful industry for investors. It’s worth trillions of dollars worldwide and has a constant need for innovation. People will always seek cures for diseases and a better quality of life.
But the stock market can occasionally do things that don’t make sense, including selling off emerging healthcare stocks that are bringing new business models and technology to the industry. The three companies below are unpopular now, but they could eventually be good for both patients and your portfolio — and that’s a true win-win for all.
Image source: Getty Images.
Telemedicine has been a big theme during COVID, especially during the height of lockdowns when patients were either frightened or at risk of infection, choosing instead to connect with healthcare providers digitally. Teladoc Health (NYSE:TDOC) has played a significant role in meeting this need and has grown rapidly as a result. In 2020, revenue grew 98% over 2019 while the number of digital visits increased 156%.
TDOC Revenue (Quarterly YoY Growth) data by YCharts
Recently, growth has begun slowing as people get vaccinated and return to their physical care providers. However, it seems a strong likelihood that telehealth will still have a place in our broader care system. Digital care can help patients in remote areas or those who live far from a specialist they need.
Teladoc’s business goes beyond simply seeing patients on a screen. The company just launched Primary360, an integrated suite of digital care products to cover all areas of a patient’s needs, including primary care, mental health, and chronic illness.
The stock fell steadily throughout 2021, bringing it to a price-to-sales (P/S) ratio of just 6.5, below its pre-COVID valuation before business grew dramatically. But management is forecasting revenue growth of 25% to 30% per year through 2024, and I think the stock price could follow this growth rate because the valuation has become so depressed.
Some could argue that telehealth is a commodity, so companies need to build customer value in other ways. Hims & Hers Health (NYSE:HIMS) puts consumer branding on healthcare. It targets people (often younger) with telemedicine services for a host of potentially embarrassing conditions like hair loss and erectile dysfunction and then sells them supplements and medications on a subscription plan.
The company went public a year ago by merging with a SPAC (special purpose acquisition company). Hims & Hers has beaten analyst revenue estimates in every quarter as a public company and most recently raised its full-year 2021 revenue guidance 29% to $265 million.
However, the stock has fallen more than 60% over the past year despite this growth. Investors could be concerned with the competitive landscape. There is nothing proprietary about Hims & Hers or what it sells. There are competitors, both privately held (such as Roman) and publicly traded (like healthcare giant UnitedHealth Group).
But instead of fearing competition, I would look at the level of execution that management is displaying. CEO Andrew Dudum noted in the company’s Q3 2021 earnings call that 88% of customers remain on the platform from year two to year three. In other words, customers aren’t leaving.
The stock currently trades at a low-single-digit P/S ratio and management expects revenue to grow somewhere around 78% this year, so it looks like there is favorable risk/reward in Hims & Hers.
Oncology is an enormous niche within healthcare because cancer claims nearly 10 million lives each year. Novocure Limited (NASDAQ:NVCR) has pioneered a medical device that disrupts the growth of tumor cells by exposing them to controlled electrical fields. This technology is currently used for treating patients with glioblastoma and mesothelioma.
These conditions are less common than other types of cancer, limiting the potential use for Novocure’s device. However, the company is in the approval process with the Food and Drug Administration (FDA) for more common cancers like non-small-cell lung cancer, the most common form of cancer — approximately 84% of the 2.3 million lung cancer patients diagnosed each year are non-small cell.
If Novocure receives FDA approval for non-small-cell lung cancer, it would dramatically increase the company’s potential market. Glioblastoma occurs in roughly 250,000 people worldwide each year, just one-tenth of non-small-cell lung cases. Novocure’s device is patented, making it the only company with this device. If it’s broadly adopted to treat other cancer types, virtually all of that growth would go to Novocure.
NVCR Free Cash Flow data by YCharts
The stock has fallen steadily over the past year, down 55%. Plus, Novocure’s net income has further declined because of its spending on FDA approvals for new cancer types. The good news for investors is that Novocure generates free cash flow, which helps fund research & development.
Without a significant catalyst, the stock price might drift for now because Novocure’s existing business specializes in a rare type of cancer. But receiving FDA approval for non-small-cell lung treatments would be an absolute game-changer for the company, so investors who want to own the stock should consider buying it before the FDA’s decision sometime in 2022. At its current level, the stock could be presenting a solid opportunity.
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Stock Advisor launched in February of 2002. Returns as of 01/08/2022.
Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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