The world is not getting any younger. Over the coming decades, the United States and other developed nations will see their populations turn increasingly gray. This change in demographics stands to affect our economy, especially the healthcare industry. Investors looking to capitalize on the situation have a seemingly endless supply of options.
Baby boomers are fueling the changing demographics in America. In 2012, there were 22 people aged 65 and older for every 100 working-age people in the country. In 2030, there will be 35 people aged 65 and older for every 100 working-age people, according to a recent analysis from the Census Bureau. After 2030, the number continues to increase slightly to 36 people by 2050 when the nation’s 65 and older crowd is projected to reach almost 84 million, double its size from 2012.
Fidelity notes that the healthcare sector is likely to grow faster than the overall economy. In fact, the government estimates that healthcare spending in the U.S., which already amounts to $3 trillion per year and accounts for 18 percent of gross domestic product, will rise by an average of 5.8 percent annually over the next eight years.
Let’s take a look at three stocks that offer investors exposure to the healthcare industry.
1. Cerner (NASDAQ:CERN)
Founded in 1979, Cerner is a health information technology company connecting people, information, and systems at approximately 14,000 facilities worldwide. Recognized for innovation, Cerner solutions assist clinicians in making care decisions and enable organizations to manage the health of populations. The company provides clients with a wide range of in-house services, as well as an integrated clinical and financial system to help organizations manage revenue.
The move to digitize medical records in recent years has fueled growth at Cerner. In July, the company announced that quarterly bookings jumped 15 percent year-over-year to a new all time high, while revenue surged 20 percent in the same period.
“Our outstanding second quarter results reflect Cerner’s strong position in a growing industry,” said Neal Patterson, Cerner Chair, CEO, and co-founder. “Healthcare providers face a growing list of measures and mandates that are putting pressure on them to lower costs while also improving quality. We believe information technology is the biggest lever to help them address these challenges, and we are continuing to invest heavily in R&D to not only help providers navigate the current environment, but also prepare them for the future.”
2. DaVita Healthcare Partners (NYSE:DVA)
The Denver-based company provides a variety of healthcare services throughout the United States and abroad. DaVita is a leading provider of kidney care in the United States, delivering dialysis services to patients with chronic kidney failure and end-stage renal disease. As of the end of 2013, DaVita operated or provided administrative services at 2,074 outpatient dialysis centers located in the country, serving approximately 168,000 patients. The company also operated 73 outpatient dialysis centers located in 10 countries outside the United States.
Investors will find themselves in good company with DaVita. Berkshire Hathaway (NYSE:BRKA) has a stake of 37.6 million shares, worth about $2.7 billion, as of the end of the second-quarter. The Warren Buffett-led company has been investing in DaVita since 2011. However, while Buffett is typically responsible for billion-dollar positions at Berkshire, he is not likely responsible for this investment. Ted Weschler, one of Buffett’s hand-selected portfolio managers, is the major bull behind DaVita. He has been investing in the healthcare company for more than a decade.
3. Vanguard Healthcare Index (NYSE:VHT)
Instead of trying to pick an individual company that stands to benefit from healthcare growth, some investors may simply want to own the entire industry through an exchange-traded fund. The Vanguard Healthcare Index seeks to track the performance of a benchmark index that measures the investment return of stocks in the healthcare sector. It’s passively managed and includes some of the biggest names in the industry, including Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE), Merck & Co. (NYSE:MRK), and Gilead Sciences (NASDAQ:GILD).
Shares of the ETF are up about 16 percent this year, and have gained 135 percent over the past five years. The expense ratio is also an attractive 0.14 percent, which is 90 percent lower than the average expense ratio of funds with similar holdings.
Although the impressive returns of the healthcare industry may be reason for caution, the industry still appears to have significant upside. Investors should note that 89 percent of the healthcare companies in the S&P 500 reported better-than-expected earnings for the second-quarter, the highest beat rate among all major industries, according to data from FactSet.
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