In this article, we will be taking a look at the 8 most promising healthcare stocks according to hedge funds.
The Healthcare Sector: Growth, Innovation, and the Impact of AI
The healthcare sector depends on medical technology advancements, particularly devices used in disease prevention, diagnosis, and treatment. Unlike pharmaceuticals, medical devices work through physical or mechanical means rather than chemical processes. Key products include pacemakers, imaging equipment, dialysis machines, and implants.
In the US, the healthcare sector is flourishing. According to a recent estimate, the country’s healthcare spending increased by 7.5% in 2023, above the nominal GDP growth rate for the same year. A record 93.1% of Americans now have health insurance, which helped fuel last year’s sharp increase in healthcare spending. The country’s national healthcare spending is expected to increase at an average rate of 5.6% between 2023 and 2032, above the 4.3% growth predicted for GDP.
Additionally, the industry is growing quickly on a global scale. According to recent McKinsey projections, healthcare profits would increase at a compound annual growth rate (CAGR) of 7% from $583 billion in 2022 to over $800 billion by 2027. Although labor shortages and rising inflation rates continued to pressure the business in 2023, a good risk-reward climate in the sector is expected to make 2024 a year of recovery. According to the American investment firm, the events of 2023 have produced an alluring opportunity for investors to engage in the healthcare industry.
According to research published this month by Silicon Valley Bank, investments in artificial intelligence (AI) in the healthcare sector have also increased dramatically in recent years, expanding at a rate twice as fast as the IT sector. According to the report, businesses using AI account for one out of every four dollars spent in the healthcare industry. The Silicon Valley Bank anticipates that over $11 billion will be spent in the AI healthcare industry this year, with an estimated $2.8 billion already invested in 2024.
Investor confidence in the healthcare industry is still high, according to Deloitte’s 2024 Global Health Care Sector Outlook. The industry received $31.5 billion in private equity funding between 2019 and 2022. Over the next five years, the United States healthcare sector might save almost $360 billion thanks to the numerous businesses integrating artificial intelligence into their operations. Shortly, AI is probably going to have a big impact on medical administration, diagnosis, treatment, and patient care. Predictive analytics and health record automation are expected to further improve the effectiveness of healthcare providers and their offerings.
In recent months, growing economic uncertainty has prompted a shift toward more defensive stocks, with healthcare emerging as a key beneficiary. The broader market’s healthcare sector has surged by over 3.6% and in the past year, it has returned over 11%. In view of this, we will take a look at some of the most promising stocks from the healthcare sector.
A smiling healthcare professional, treating a patient with the PLEX platform.
Our Methodology
For our methodology, we picked the most weighted stocks from the iShares Global Healthcare ETF and then ranked them based on their total number of hedge fund holders as of Q3 2024, as tracked by the Insider Monkey database.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
8. Novartis AG (NYSE:NVS)
Number of Hedge Fund Holders: 24
Novartis AG (NYSE:NVS) is a global pharmaceutical company that develops, manufactures, and sells innovative medicines to address various medical needs. The company focuses on creating treatments for a wide range of conditions, including cardiovascular diseases, cancer, neurological disorders, and immunological diseases.
According to Wall Street analysts, products like Kesimpta, Kisgali, and Cosentyx should help the company’s revenue and core operating income expand in the next quarters. Additionally, Novartis AG (NYSE: NVS) is still confident in its creative pipeline and capital allocation plan. The business expects to surpass the peak revenue projection for Cosentyx, Kesimpta, and Entresto, even as it continues to diversify its portfolio with FDA applications.
Novartis AG (NYSE: NVS) expects protection into the mid to late 2030s and has been developing its medication, canalumab, for other immunological diseases. Operating income (continued operations) for the company was $4 billion in Q2 2024, representing a 47% increase on a constant currency basis. Greater net sales and fewer impairments drove this gain, which was partially offset by greater R&D expenditures.
Novartis AG (NYSE: NVS) anticipates a mid-to-high teens increase in core operating income and a high single to low double-digit growth in net sales for FY 2024. As of Q3 2024, 24 hedge funds in the Insider Monkey database held shares in the stock.
Aristotle Capital Management, LLC, an investment management company, released its second-quarter 2024 investor letter. Here is what the fund said about Novartis AG (NYSE: NVS):
“We have been investors in the Swiss pharmaceutical company Novartis AG (NYSE:NVS) for over a decade, having first purchased shares in 2011. During our holding period, the company has undergone significant changes. Vasant (“Vas”) Narasimhan was promoted to CEO in 2018 and, we believe, has positively influenced the company’s culture and helped shift the business more toward innovative medicines. Examples include the sale of Novartis’s consumer (over-the-counter) joint venture; the divestiture of its vaccines and animal health businesses; the spinoff of Alcon, a global leader in the treatment of eye diseases and eye conditions (also an International Equity holding); and most recently, the spinoff of generics manufacturer Sandoz. As part of its portfolio transformation, Novartis has been able to improve its margins and gain a share of branded pharmaceuticals. With many catalysts having neared completion, we decided to sell Novartis to fund the purchase of what we believe is a more optimal investment in Roche.”
7. AstraZeneca PLC (NASDAQ:AZN)
Number of Hedge Fund Holders: 42
AstraZeneca (NASDAQ:AZN) is a global biopharmaceutical company that develops, manufactures, and sells prescription medicines for various medical conditions. The company focuses on three main therapeutic areas: oncology, cardiovascular, renal, and metabolism (CVRM), and respiratory and immunology. It is one of the most promising stocks in the healthcare sector.
Due to its innovation pipeline and rising demand for its current treatments, AstraZeneca (NASDAQ:AZN) has a promising future. With Tagrisso, Imfinzi, and Calquence all boosting sales, the company’s oncology therapy division is a major growth engine. Due to the steady sales of Symbicort and the quick growth in Farxiga volume, the company’s cardiovascular, renal, and metabolism (CVRM) therapeutic division is also expanding rapidly. Ultomiris and Soliris are driving revenue growth in the company’s rare disease therapeutic division, which is also exhibiting potential.
With overall revenue rising 13.3% year over year to $12.9 billion in Q2, AstraZeneca (NASDAQ:AZN) announced solid earnings, beating analyst consensus by $410 million. The company’s oncology division was a major growth engine, with revenue rising 15% annually to $5.3 billion. With an A+ credit rating from S&P and a net debt-to-adjusted EBITDA ratio of 1.8, the company’s financial sheet is still strong.
Growth prospects for AstraZeneca (NASDAQ:AZN) are still bright, as the company is expected to introduce more than 25 cutting-edge products by 2030. With 189 projects under development, it has a strong pipeline. For the current year, the company’s earnings are predicted to have increased by over 29%.
As of Q3 2024, 42 hedge funds in the Insider Monkey database held shares in the stock. The largest stakeholder in the company was Fisher Asset Management with stakes worth over $816.5 million. Street analysts hold a consensus Strong Buy rating on the stock with an upside potential of over 23%.
6. Novo Nordisk A/S (NYSE:NVO)
Number of Hedge Fund Holders: 61
Novo Nordisk A/S (NYSE:NVO) is a Danish pharmaceutical company that specializes in diabetes care and other chronic diseases. At its core, the company develops, produces, and markets innovative biological medicines. Its primary focus is on insulin products for diabetes treatment, but the company is also concentrated on growing its market share and improving the products it offers, especially in the treatment of diabetes and obesity.
At constant exchange rates, Novo Nordisk A/S (NYSE:NVO) had a remarkable sales growth of 25% in the first half of 2024, mostly due to rising demand for its GLP-1-based diabetic and obesity medicines. The company is effectively reaching more patients with cutting-edge treatments like Wegovy and Ozempic, as seen by the 36% growth in North American operations and the 11% growth in foreign operations. Additionally, Novo Nordisk is making progress in research and development, as seen by encouraging outcomes from clinical studies for medications targeted at diseases like cardiovascular risk and hemophilia A. It is among the most promising stocks in the healthcare sector.
Furthermore, Novo Nordisk A/S (NYSE:NVO) is successfully controlling supply and demand as it strategically introduces Wegovy, a weight-loss drug, into foreign markets. In the diabetes industry, the company has also significantly increased its market share, surpassing its target of one-third of the market by 2025 and currently holding a 34.1% worldwide value market share. The business exhibits a strong dedication to innovation with a solid product pipeline and current clinical studies.
Over the past five years, Novo Nordisk A/S (NYSE:NVO) has achieved an average annual growth rate of 17.17% in revenue and 19.06% in net income. As of Q3 2024, 61 hedge funds in the Insider Monkey database held shares in the company. Artisan Partners stated the following regarding Novo Nordisk A/S (NYSE:NVO) in its “Artisan Global Equity Fund” Q1 2024 investor letter:
“In addition, shares of Novo Nordisk A/S (NYSE:NVO) rose after it reported phase 1 clinical trial results for its new experimental obesity drug Amycretin, a single molecule that operates as a GLP-1 receptor agonist, reducing one’s appetite. The new oral treatment achieved a 13.1% average weight loss after 12 weeks, more than doubling the efficacy of Wegovy for the same period. This result also bested Lilly’s Orfoglipron, another experimental drug that achieved 5%–6% average weight loss earlier in its trials. While the Amycretin data are preliminary, investors were encouraged by the prospects of Novo Nordisk solidifying a best-in-class obesity designation, a desirable status given rising competition. In our view, Novo Nordisk has the best obesity/Type 2 diabetes pipeline in the industry, which should help protect this franchise from competition over the next 10 years.”
5. Abbvie Inc (NYSE:ABBV)
Number of Hedge Fund Holders: 68
AbbVie Inc. (NYSE:ABBV) is a global biopharmaceutical company that develops and markets advanced therapies for complex and chronic conditions. The company’s primary focus is on immunology, oncology, neuroscience, and virology. AbbVie’s flagship product, Humira, has been a cornerstone of its success, used to treat various autoimmune diseases such as rheumatoid arthritis and Crohn’s disease.
Over the next three years, AbbVie Inc. (NYSE:ABBV) is expected to see mid-single-digit sales growth because of the company’s low patent losses. Furthermore, the $10 billion purchase of ImmunoGen, which expanded its oncology portfolio to include the antibody-drug combination Elahere, is projected to make a substantial contribution; Barclays predicts that revenues will surpass $2 billion by the end of the decade.
The global revenues of AbbVie Inc. (NYSE:ABBV) in Q2 2024 were $14.462 billion, a reported 4.3% increase and a 5.6% operational growth from the same period last year, beating Wall Street’s forecasts by 3.1%. Its immunology business was a major contributor to the expansion, as sales of Skyrizi increased by almost 45% to $2.7 billion and Rinvoq by nearly 56% to $1.4 billion. Additionally, global sales of the oncology portfolio increased by 10.5% to $1.6 billion. Unfortunately, the competition from biosimilars caused Humira sales to drop 29.8% to $2.8 billion, somewhat offsetting this rise.
As of Q3 2024, from the total hedge funds tracked by Insider Monkey, 68 hedge funds held stakes in the company with Citadel Investment Group being the largest stakeholder with stakes valued at over $487.2 million.
4. Johnson & Johnson (NYSE:JNJ)
Number of Hedge Fund Holders: 81
Johnson & Johnson (NYSE:JNJ) is a global healthcare giant that operates in three main segments: pharmaceuticals, medical devices, and consumer health products. The company develops and manufactures a wide range of products, from everyday items like Band-Aids and Tylenol to advanced medical devices and innovative prescription drugs.
The regulatory approvals for RYBREVANT and TREMFYA have been acquired by Johnson & Johnson (NYSE:JNJ). The company strengthened its position in cardiovascular intervention and medical technology by acquiring Shockwave Medical in April. It is anticipated that all segments will rise at a compound annual growth rate of 5–7% between 2025 and 2030. Furthermore, there are about ten assets in the Innovative Medicine sector that might generate over $5 billion in expected operational sales each.
Johnson & Johnson (NYSE:JNJ) is a strong dividend payer, having raised its payouts for over 60 consecutive years. The company offers a quarterly dividend of $1.24 per share for a dividend yield of over 3%.
As of Q3 2024, 81 hedge funds tracked by Insider Monkey held stakes in Johnson & Johnson (NYSE:JNJ) with Fisher Asset Management being the largest stakeholder with stakes worth over $1.2 billion.
3. Merck & Co., Inc. (NYSE:MRK)
Number of Hedge Fund Holders: 86
Merck & Co., Inc. (NYSE:MRK), known as MSD outside of North America, is a global pharmaceutical giant that develops, manufactures, and markets prescription medicines, vaccines, and animal health products. The company’s primary focus is on creating innovative solutions for some of the world’s most challenging health issues, including cancer, infectious diseases, and cardiovascular disorders.
The company’s cancer medication Keytruda, which rose to the top of the global medicine sales charts, is the main focus of its long-term prospects. The pharmaceutical company’s second-quarter revenue of $16.1 billion represented a 7% rise over the prior year. Keytruda’s $7.3 billion in sales represented a 16% rise over the same time last year.
Although a significant amount of Merck & Co., Inc.’s (NYSE:MRK) revenue comes from Keytruda, the firm has been attempting to expand its pipeline and reduce its need for the enormously popular blockbuster drug. To compensate for the lost revenue, new drugs like WINREVAIR, which treats pulmonary arterial hypertension, will be essential.
By 2029, analysts estimate that the company’s sales will have surpassed $6 billion and peaked at a significantly higher $11 billion. Although Winrevair and other resources may mitigate the impact on Merck & Co., Inc. (NYSE:MRK) and perhaps ensure a rise in sales, these numbers are not similar to those of Keytruda. A more modest growth stimulus is the pneumococcal vaccination Capvaxive, which regulators approved earlier this year. Sales could reach over $1 billion by 2027.
To co-develop three of its antibody-drug conjugates, Merck & Co., Inc. (NYSE:MRK) agreed to pay Japanese company Daiichi Sankyo $5.5 billion last year, increasing its investment in cancer treatments. Consequently, the company should be able to expand its operations even after the patents for Keytruda expire, given the abundance of opportunities available and the potential for even more in the future. As of Q3 2024, 86 hedge funds in Insider Monkey’s database held stakes in Merck & Co., Inc. (NYSE:MRK), with Fisher Asset Management being the largest stakeholder with stakes worth over $1.6 billion.
Regarding Merck & Co., Inc. (NYSE:MRK), Carillon Tower Advisers’ Carillon Eagle Growth & Income Fund made the following statement in its investor letter for the first quarter of 2024:
“After posting lackluster returns in 2023, Merck & Co., Inc. (NYSE:MRK) got off to a strong start in January by raising the long-term sales forecasts for its oncology and cardiology pipelines and reporting solid fourth-quarter results, coupled with strong financial guidance for 2024. Merck shares also finished the quarter strong after receiving U.S. Food and Drug Administration approval in late March for a new cardiology medicine with the potential to contribute significantly to sales growth over the next several years.”
2. Eli Lilly and Company (NYSE:LLY)
Number of Hedge Fund Holders: 106
Eli Lilly & Company (NYSE:LLY) is a global pharmaceutical corporation that develops, manufactures, and sells a wide range of medicines. Founded in 1876, the company has grown into one of the world’s largest pharmaceutical firms, focusing on areas such as diabetes, oncology, immunology, and neuroscience.
The company is aggressively working toward a strong plan focused on increasing the range of products it offers and improving its production capacity. With recent achievements including the FDA’s clearance of Kisunla for Alzheimer’s and the filing of tirzepatide for obstructive sleep apnea in the US and the EU, the firm is concentrating on tackling important health challenges like obesity and Alzheimer’s disease. With 11 novel compounds in clinical trials to treat obesity and other chronic illnesses, Eli Lilly & Company (NYSE:LLY) is also making significant investments in its pipeline. To improve its immunology pipeline with oral integrin therapies—which are intended to treat severe chronic illnesses—the business also recently agreed to purchase Morphic Holding, Inc.
With a 36% rise in revenue over the same period last year, Eli Lilly & Company (NYSE:LLY) achieved outstanding success for the second quarter of 2024. Strong sales of Mounjaro, Zepbound, and Verzenio were the main drivers of this expansion. The market demand for these new items and their successful launch led to a 68% increase in earnings per share. The company has increased its full-year revenue projection by $3 billion as a result of these accomplishments, demonstrating its confidence in its trajectory of future growth.
Eli Lilly and Company (NYSE:LLY) also revealed a substantial $4.5 billion commitment to build the Lilly Medicine Foundry on October 2. The LEAP Research and Innovation District in Lebanon, Indiana, will house this new facility for drug discovery and advanced manufacturing. Lilly will be able to investigate new production techniques and expand the capacity for clinical trial medications because of the facility’s unique integration of drug research and manufacture in one location.
According to Insider Monkey’s database of over 900 hedge funds as of Q3 2024, Eli Lilly and Company (NYSE:LLY) was held by 106 hedge funds. Baron Funds stated the following regarding Eli Lilly and Company in its “Baron Health Care Fund” second quarter 2024 investor letter:
“Shares of global pharmaceutical company Eli Lilly and Company (NYSE:LLY) increased on continued investor enthusiasm around GLP-1 drugs for diabetes and obesity. We remain shareholders. Lilly’s Mounjaro/Zepbound not only offers superb blood sugar control for diabetics but can drive 20%-plus weight loss and likely improve cardiovascular outcomes in both diabetic and non-diabetic obese patients. Lilly is developing next-generation drugs, including retatrutide, which drives approximately 25% weight loss, and orforglipron, a daily pill that produces approximately 15% weight loss. In the U.S. alone, there are 32 million Type 2 diabetics and an additional 105 million obese patients who we estimate would qualify for GLP-1 drugs. Although supply and access are limited near term, we think GLP-1 drugs will become the standard of care for both diabetes and obesity and will become a $150 billion-plus category. We see Lilly setting a high efficacy bar and capturing significant long-term market share. We think the adoption of GLP-1s will drive Lilly to triple total revenue by 2030.”
1. UnitedHealth Group Incorporated (NYSE:UNH)
Number of Hedge Fund Holders: 112
UnitedHealth Group Incorporated (NYSE:UNH) is a diversified healthcare company with two main segments: UnitedHealthcare and Optum. The company provides health insurance across the U.S., offering various plans and partnering with over 1.3 million healthcare providers and 6,700 hospitals. Optum focuses on healthcare services powered by technology and data analytics, supporting people, partners, and providers to enhance health outcomes.
UnitedHealth Group Incorporated (NYSE:UNH) has introduced a new national gold card scheme to lower administrative costs and raise the standard of care. For eligible in-network providers, this program will result in a 500,000 yearly decrease in prior authorizations.
AI is also significantly contributing to increased productivity and better patient care for UnitedHealth Group Incorporated (NYSE:UNH). AI is being used by advanced practice physicians to compile patient histories, which frees up time for more hands-on patient care. To improve service and save time, nurses are employing GenAI to evaluate documentation more effectively. Additionally, it powers provider searches and client contacts, freeing up advocates to concentrate on more intricate questions and enhance the customer experience.
UnitedHealth Group Incorporated (NYSE:UNH) generated $100.82 billion in revenue in the third quarter of 2024, a 9.16% increase over the same period the previous year. Strong pharmacy care offerings, increased pharmacy benefits management from new clients, and growing specialized services drove OptumRx’s $5 billion increase in revenue to over $34 billion. Revenues from OptumInsight remained steady at about $5 billion, and the approximately $33 billion revenue backlog grew by over $1 billion over the previous year.
Invesco Growth and Income Fund stated the following regarding UnitedHealth Group Incorporated (NYSE:UNH) in its Q2 2024 investor letter:
“UnitedHealth Group Incorporated (NYSE:UNH): Like many managed care providers, United Health has come under pressure from rising medical costs and higher-than-expected utilization. The stock is currently undervalued based on our analysis. We view the company as a high-quality compounder with secular growth opportunities in the managed care segment. The US Presidential election may cause additional near-term uncertainty, but we believe United Health will be able to rebound once pricing and utilization issues normalize.”
Overall, UNH ranks first among the 8 most promising stocks according to hedge funds. While we acknowledge the potential of healthcare companies, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UNH but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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