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Top Healthcare Stocks to Buy for 2021

Real Money contributor Stephen Guilfoyle checks which healthcare sector names could perform best over the coming year.

I'm going to recommend healthcare stocks for your portfolio in 2021, but first, let's check the sector's vitals.

Using the exchange-traded fund Health Care Sector Select SPDR  (XLV) - Get Health Care Select Sector SPDR Fund Report as a proxy, healthcare as a sector is up 11.3% so far in 2020. 

How good is that? I'll tell you, but I'm going to avoid using colorful adjectives that we may have used to describe the past year (hey, this is intended to be a professional investing news service, right?).

So, let me say that in a normal year if there were such a thing, 11.3% is not too shabby. Not at all. 

But in 2020? Eleven-plus percent lands the healthcare sector in fifth place out of eleven, according to Standard & Poors. The sector seriously outperformed the Dow Industrials, which were up 5.8%, but seriously underperformed the Nasdaq Composite index, which is up a whopping 42.1%. It also slid in just behind the S&P 500 itself, which is up 14.6%. 

As with all sectors, this one is made up of a number of industries, and it gets sloppy. (For comparison, I recently wrote about industrials picks for 2021, so if you want complicated, there you have it.)

Healthcare includes medical supply and medical equipment companies, biotechs, pharmaceutical firms and providers. You can see tremendous differences in performance among all of those types of business. But there is also a good bit of crossover for some companies among industries, leaving an investor unable to place a number of stocks into neat little boxes.

Overall, one might assume that in 2020, medical suppliers and medical equipment providers outperformed the rest of the pack. That would be correct. Some might also assume that biotechs outperformed pharmaceuticals, but that outperformance brings with it volatility. Many of the big pharmaceutical names can afford to pay out a consistent dividend, while most biotechs can't. In addition, where does one effectively draw the line between the two? Then we have the so-called providers. But are many providers even comparable? Pharmacies, managed care facilities, hospitals, and laboratories are all providers.

What we do know is that the market has recovered more quickly than has the economy. We also know that early in the year there will be further stress placed on the infrastructure of American and global healthcare systems. That is, however, until we reach that sunny day when this plague that has set back an entire planet recedes and unleashes what will be the consequence of delayed treatment for the countless number of patients suffering from any number of non-Covid related maladies.

The SARS-CoV-2 virus had unleashed many attempts made by many firms at successfully finding a safe and effective vaccine, not to mention therapeutics for the already stricken. One would think that Pfizer (PFE) - Get Pfizer Inc. Report would have had a great year, as this firm -- with its German partner BioNTech  (BNTX) - Get BioNTech SE Report -- crossed the finish line first. Pfizer has gone strictly sideways in 2020, while BNTX has scored a year-to-date gain of roughly 185%. Pfizer does pay out a handsome $1.56 to shareholders annually, currently yielding 4.2%. Then we have Moderna  (MRNA) - Get Moderna, Inc. Report, a firm that was second to receive emergency use authorization from the Food and Drug Administration for its vaccine. MRNA is now up 530% for the year, but after having been up well more than 700% at one point. Has Moderna peaked?

Is investing in a vaccine even a good idea? 

Let me say that I have and I still am stuck with larger firms involved in a broad array of treatments for a wide variety of ailments. That is, at least, outside of Moderna, which I have been with since the beginning of this nightmare.

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That means that for the most part, I missed the outsized move made by Novavax (NVAX) - Get Novavax, Inc. Report, and the (in percentage terms) "Stocks Under $10" eligible Vaxart (VXRT) - Get Vaxart, Inc. Report.

I am currently long Johnson & Johnson (JNJ) - Get Johnson & Johnson Report and Merck (MRK) - Get Merck & Co., Inc. Report. I am also starting to like Bristol-Myers Squibb  (BMY) - Get Bristol-Myers Squibb Company Report, not really because of how broad the firm's activities are and not because Goldman Sachs made the stock a "conviction buy" a few weeks ago, but because the stock has gone sideways for a year, and I see it as one that perhaps can be owned. And, it can be owned without a lot of risk to the principal. The shareholder, in fact, is paid 3.1% annually just to sit around, while regularly writing calls against the position (on either a bi-weekly or monthly basis) without a tremendous overt opportunity risk in being called away.

Let's try to keep this somewhat simple. For a more speculative purpose, investors can go in a number of directions. I am going to give you where I am going, or rather where I am. Sure, I speculate, but rarely do I sit in those positions for very long. Usually, I either take my 20% to 25% profit or deal with a 7% to 8% loss. Either way, I take my leave and don't usually look back. So, where am I likely to stay put, perhaps for an entire year? No promises ... but, let's have a look:

AbbVie (ABBV) - Get AbbVie, Inc. Report. This stock broke out in late November and has since come back to earth. Readers know well that I have long been on the AbbVie bandwagon. Yes, this is the maker of Humira. That Humira of the already expired patent in Europe and eventually -- in 2023 -- expiring patent here in the U.S. This was the catalyst for the Allergan acquisition, which will plug the potential hole in cash flow at that time. AbbVie now has Botox in the stable, as well as a number of up-and-comers across a number of non-Covid-related ailments. The best aspect of being long this stock is the annual $5.20 dividend, good at these pieces for a yield of 5%. The stock still trades at less than nine-times next twelve months earnings.

Abbott Laboratories (ABT) - Get Abbott Laboratories Report. Abbott returned 24% in 2020. Why stick with this one? Simple. Not only does the firm have a strong presence in diabetes care, but has seen ever improved results in core diagnostics. Think testing for Covid is going away any time soon? Yeah, me neither, and Abbott is how I am playing the unpleasant expectation for sustained demand for identifying who is positive for the virus going forward. I will happily lose money on this position if it means that the world no longer needs to test for this virus. But that is an unrealistic hope.

CVS Health (CVS) - Get CVS Health Corporation Report. You know CVS as your neighborhood pharmacy. CVS is mentioned often in the news these days, as the chain had been chosen by health officials, along with Walgreens Boots Alliance  (WBA) - Get Walgreens Boots Alliance Inc Report, to deliver both the vaccines for Covid-19 to residents of long-term care facilities as well as Eli Lilly's (LLY) - Get Eli Lilly and Company Report antibody therapeutic. The reason to be in the stock is a mix of the firm has made itself indispensable to "Operation Warp Speed," as well as the pharmacy, and the integration of Aetna. Valued at nine-times forward-looking earnings, CVS is clearly undervalued, if investors were to value the retail pharmacy, the pharmacy benefits manager, the insurance company, and the government contractor separately. Outgoing CEO Larry Merlo put together this super healthcare conglomerate. It will be up to his successor, Karen Lynch, who takes the reins effective Feb. 1, to make it all work. Lynch comes from the Aetna side of the business. Until then, the company will pay you 2.94% just to hang around. I'm hanging around.

Johnson & Johnson (JNJ) - Get Johnson & Johnson Report. Why is this one here? Easy answer. This will be the "next" one lined up for Covid vaccine data readouts. Does that make the firm more profitable? Probably not. With some data expected perhaps in January and best hopes for an FDA emergency use authorization as early as February, this stock will be in play -- as keyword-reading algorithms determine price these days. This may also help with a number of PR problems that the firm has been hit with over the years. JNJ pays out 2.65%, and I think at least for the early part of the year, this is a slightly better pick than either BMY or MRK. I like them all, though.

Teladoc Health  (TDOC) - Get Teladoc Health, Inc. Report. This one is tough because I have already sold my stake. But even as the company has yet to be profitable, I think we all see the concept of telemedicine as certainly headed that way and in a hurry. The firm still has to digest Livongo Health to get where it is going, but I do believe in the direction, and I do believe that I will be back in this name as the current surge in new infections of Covid-19 forces more and more patients with other problems online. This evolution in medicine is probably inevitable.

Bristol-Myers Squibb and Merck. Neither is really a leader in the Covid chase. Both are significantly entrenched in fighting just about everything else. Both are dividend stocks.

McKesson  (MCK) - Get McKesson Corporation Report. Just who do you think is going to help distribute millions of doses of these Covid vaccines? Besides delivery services firms, and besides the U.S. Army? That's right. These guys.

Apple  (AAPL) - Get Apple Inc. Report. Just in case you thought this firm was all about iPhones and now, electric vehicles, this is also a firm probably on its way to becoming a healthcare leader. How so? Its growing line of wearables and subscription services. As a Covid survivor, I almost constantly have to check my vitals. Do you want to stop to take your blood pressure or your pulse all day long? It is a real pain in the neck and interrupts not only my work at times, but changes the way I eat or when I can exercise. Imagine a watch that gives you all of that information in real-time? Oh, wait... Apple has.

Stephen “Sarge” Guilfoyle writes on stocks and the markets each trading day for Real Money, TheStreet’s premium site, including his popular Market Recon column every morning. Guilfoyle is also co-portfolio manager of TheStreet’s Stocks Under $10.

At the time of publication, Guilfoyle was long PFE, JNJ, MRNA, MRK, ABBV, ABT, CVS, MCK, AAPL equity.