3 Best of Breed Healthcare Stocks

By Markets Fool.com

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Source: Pixabay

Pretty much any stock can have its day in the sun, but over the long run quality counts. The best stocks to hold onto tend to be the best companies with the best business models.

Investors looking for these kinds of high-quality stocks in the healthcare sector won't be disappointed. There are plenty of solid, well-run healthcare companies with stocks that should perform well over the long run. Here are three healthcare stocks in particular that I think should be considered as best of breed.

1.Johnson & Johnson
In a way, Johnson & Johnson isn't just best of breed -- it's perhaps the only member of its breed. There are large consumer products companies. There are large pharmaceutical companies. And there are large medical device companies. J&J is a unique combination of all three.

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Source: Johnson & Johnson

Pharmaceuticals stands out as J&J's most successful business segment, with $32.3 billion in sales last year -- up almost 15% from 2013. While many drugmakers depend heavily on just one or two key products, J&J claims nearly a dozen blockbuster drugs in its lineup. Several of these winners, like Simponi, Stelara, and Xarelto, are experiencing sales growth exceeding 25% annually.

While J&J's other segments aren't performing quite as impressively, they still generate plenty of money for the healthcare giant. The Medical Devices segment made $27.5 billion in 2014, reflecting a small drop from the prior year that stemmed largely from the sale of the company's Ortho-Clinical Diagnostics business. Consumer Products brought in $14.5 billion last year, less than the 2013 total sales due in part from another divestiture.

Long-term investors can find lots to like about Johnson & Johnson. Looking for stability? The company has been around since 1887. Love dividends? J&J's yield currently stands at 3% -- and the company has increased dividend payments for 52 consecutive years. Want growth? I expect J&J's Pharmaceuticals unit to continue driving financial performance, perhaps helped by a few more strategic sales in its other segments.

2.UnitedHealth Group
Bigger isn't always necessarily better, but UnitedHealth's ranking as the largest health insurer in the U.S. helps in several ways. The company's size enables it to negotiate more effectively with healthcare providers. This allows UnitedHealth to keep its pricing competitive, which ultimately helps gain market share.

The best thing going for UnitedHealth Group, though, comes from its Optum business segment. Optum delivered the lion's share of UnitedHealth's year-over-year revenue growth in 2014 and all of its earnings growth.

Source: Optum

There are three business units within Optum -- OptumHealth, OptumInsight, and OptumRx. OptumHealth focuses on care management. OptumInsight offers health information technology solutions and consulting. OptumRx's pharmacy benefit management services is the fastest-growing and most significant contributor to UnitedHealth's bottom line.

Despite soaring over 46% in the last 12 months, UnitedHealth's stock doesn't appear to be too expensive with a forward earnings multiple of 16.5. And while the dividend yield is only 1.3% right now, with a low dividend payout ratio of 25% I expect higher dividends could be on the way.

3.Illumina
It's not nearly as large as the other two companies on the list, but Illumina certainly deserves to be recognized as a best of breed healthcare stock. Illumina's genomic sequencing technology has changed the landscape for disease research and drug development.

Source: Illumina

Thanks to Illumina's Hi Seq X Ten system, an entire human genome can now be mapped for less than $1,000. And it can perform more than 18,000 of these mappings in a year. To put that into perspective, consider that the first mapping of the human genome took more than a decade to complete at a cost of around $3 billion.

Illumina doesn't just offer massive-power systems like Hi Seq X Ten. The company also sells desktop systems, MiSeq and NextSeq, that provide more flexibility for targeted genomic sequencing.

On the competitive front, Chinese genomics company BGI could become a more serious challenger for Illumina. The company's Complete Genomics unit recently announced its own high-powered sequencing system that could compete against Illumina's Hi Seq X systems. However, I expect Illumina's investment in research and development to keep its leadership role secure.

Unlike J&J and UnitedHealth, Illumina doesn't pay out a dividend. The stock is also priced at a premium, with a forward earnings multiple of 52. The promise of genomic sequencing, though, makes Illumina a best of breed stock that investors still might want to consider.

The article 3 Best of Breed Healthcare Stocks originally appeared on Fool.com.

Keith Speights has no position in any stocks mentioned. The Motley Fool recommends Illumina, Johnson & Johnson, and UnitedHealth Group. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.