Is Now the Time to Buy Health Care Stocks?

Health care stocks are on the up, but does that mean you should go ahead and buy anything? In short: no. Watch for these red flags.

Workers use a microscope to do medical research in a modern laboratory.

Source: Getty Images

Health care stocks have been some of the hardest ones to figure out on the TSX lately. While some exploded if they had practically anything to do with the pandemic, others sunk into oblivion for having nothing to do with it.

Examples? Health care stocks producing ventilators went up. Companies like Pfizer of course also saw a boost. And yet those doing research into cancers, heart conditions, pretty much anything else slumped beyond recognition.

But with restrictions easing and more of the world vaccinated, even major health care stocks have recognized it’s time to move on. So, Motley Fool investors, should you?

The bull side

With less focus, and more importantly money, on COVID-19, there are a lot of opportunities out there for those interested in health care stocks. In fact, all those companies that didn’t have cash coming their way for the last two years may suddenly see an immense inpouring of it.

That’s especially true for those more “popular” areas of health care stocks, such as heart disease, cancer treatment, and other areas I previously spoke about. But many others are worth considering as well. There are the big pharmas that operate in practically every area I’ve mentioned. There are the companies that provide the devices you need for health care in general, from syringes to masks. Then there are companies that oversee drug development, either in a focused or general way. In any case, these are companies that will remain strong and be around for years to come if you look into them properly. Because if investors neglect them, that’s what can lead to the bear case.

The bear side

There are a few hiccoughs to the argument that health care stocks are a major buy. First off, the TSX in general is rebounding, and this can cloud the judgement for many seeking out growth stocks. With everything growing, it looks as if anything is a good buy. That’s simply untrue. So there are a number of red flags Motley Fool investors should watch for.

How is the company valued? By this, I mean does it have a lot of debt saddled to it? Does it have a high market capitalization? Does it have a lot of historical performance to fall back on? And, of course, does it have a future among health care stocks, or is it pretty much saddled to one horse? That could be a major problem if that horse goes lame.

Then there’s the fact that the pandemic is not over. Sure, it seems like that to many out there. But for Motley Fool investors seeking out opportunities, it’s an important one to remember. It was just a few months ago that China went through lockdowns. Lockdowns that put a stop to major production, and this could still affect health care stocks.

So what health care stocks should you buy?

For me, instead of making risky choices I would instead look at an exchange-traded fund (ETF) focused on health care stocks. That takes the guesswork out, and instead allows Motley Fool investors to have a team of experts working on their behalf.

One such ETF would be the CI Health Care Giants Covered Call ETF (TSX:FHI). This ETF holds a slew of health care stocks, all giants that have been around for a long time, with plenty of growth in store for the future. It trades at a reasonable 22.6 times earnings, offers an 8.66% dividend yield, and has climbed 8% in the last two months alone. It’s now only down 2% from year-to-date levels. This ETF also gives you diverse exposure to the industry for those not knowing where to start.

Bottomline

Health care stocks are up, but that doesn’t mean you should buy any of them. By investing in an ETF like CI Health Care Giants ETF, you can gain that exposure and growth, but in a much safer way.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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