What Are the Best Healthcare Stocks to Buy? Here Are a Top AI System's 5 Favorites

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What if a complex artificial-intelligence (AI) system could pick stocks for you? With the AI Powered Equity ETF (AIEQ) launched by Equbot, it can. Equbot used IBM Watson, one of the world's leading AI platforms, to try to identify stocks that would beat market returns with similar volatility levels as the overall market.

With healthcare making up nearly one-fifth of the U.S. economy, I was curious which healthcare stocks Equbot's AI system would pick. The top five healthcare stocks AIEQ owns right now are Envision Healthcare (NYSE: EVHC), Encompass Health, UnitedHealth Group (NYSE: UNH), AbbVie (NYSE: ABBV), and PDL BioPharma (NASDAQ: PDLI). Although Equbot doesn't provide any details about how its AI system chooses stocks to buy, here's why I suspect these healthcare stocks made the top of the list.

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Envision Healthcare

Envision Healthcare currently consists of three core businesses. American Medical Response (AMR) provides medical transportation services. Emcare provides integrated facility-based physician services to hospitals. Evolution Health provides home health, hospice, and infusion services. However, Envision is in the process of selling AMR for $2.4 billion.

My hunch is that Equbot's AI system likes two things about Envision Healthcare stock. One is that the company is in distress. Over the past 12 months, the company has lost half of its market cap. It didn't help that Envision posted dismal Q3 results in November and said it was pursuing "strategic alternatives." Distressed stocks can sometimes present tremendous investing opportunities.

That leads to the second thing I suspect the AI system likes about Envision Healthcare: It's in a business with long-term growth potential. Granted, the company hasn't made smart moves in the past to achieve that potential. It wouldn't surprise me if Equbot's machine-learning algorithms "think" that Envision could be worth much more over the long run than what it's currently valued at, with the aging demographics in the U.S. driving demand for healthcare services higher.

Encompass Health

Encompass Health is one of the largest operators of inpatient rehabilitation hospitals in the U.S. and is a leader in home-based care. Before July 2017, Encompass was known as HealthSouth.

Unlike Envision Healthcare, Encompass Health isn't a company in distress. The stock enjoyed solid gains in 2017 and has performed relatively well so far this year despite the broader market pullback. Encompass has also grown revenue and earnings by solid, albeit not spectacular, rates.

Why would Equbot's AI system like Encompass Health stock? Probably because of the same demographic trends that could benefit Envision Healthcare. Inpatient rehab hospitals and home-based care should be in significantly greater demand as baby boomers reach their 70s and 80s.

UnitedHealth Group

UnitedHealth Group ranks as the largest U.S. health insurer. The company also operates the third largest pharmacy benefit manager (PBM) in the country through its Optum business unit.

I'm not surprised at all that UnitedHealth was one of the Equbot AI system's top healthcare picks. It's also one of the top 10 stocks in The Motley Fool's new Fool 100 Index. I think the IBM Watson technology that powers Equbot just might be a bit of a Foolish investor.

As with the first two stocks discussed, the growth opportunity resulting from an aging U.S. population is an important reason to buy UnitedHealth Group stock. It's also probably helpful that UnitedHealth is valued attractively, especially considering its earnings growth potential in the coming years.

AbbVie

AbbVie is one of the biggest biopharmaceutical companies on the market. The company's autoimmune-disease drug Humira was the world's best-selling drug in 2017, pulling in a whopping $18.4 billion in sales.

My guess is that Equbot's AI system likes AbbVie for the same reasons I do. The company has great growth prospects. Humira continues to rock along, sales are soaring for cancer drug Imbruvica, and AbbVie's pipeline is loaded with potential blockbusters, including Rova-T, which could become one of the biggest new drug launches of 2018.

In addition to strong growth potential, AbbVie offers a nice dividend yield of 2.47%. The company has increased its dividend every year since being spun off from parent Abbott Labs in 2013, with total dividend growth of nearly 78% since then. On top of all of this, AbbVie stock is cheap, with shares trading at less than 13 times expected earnings.

PDL Biopharma

PDL Biopharma is another biopharmaceutical company making the list of top healthcare stocks in Equbot's AI-powered ETF. Unlike AbbVie, though, PDL focuses on investing in other companies in the biopharmaceutical industry.

I think I know why the AI system views PDL Biopharma so positively. The company's market cap right now is a little under $400 million. But PDL has over $516 million in cash. Sure, PDL also has debt of nearly $241 million. However, even adjusting for that debt load, the stock trades at less than half of its book value.

Half of PDL Biopharma's revenue comes from royalties for several diabetes drugs licensed to Depomed in 2013. Around one-quarter of the company's revenue stems from Tekturna, a high blood pressure drug acquired from Noden Pharma in 2016. The Tekturna transaction was the first case of PDL acquiring a commercial-stage product to generate income from product sales. If the company is able to successfully execute more deals like that one, PDL stock could be a winner for AIEQ.

The best?

Are these five really the best healthcare stocks to buy right now? I'm not so sure.

AbbVie is one of my favorite stocks. I continue to think it will perform well over the long run. And as mentioned earlier, UnitedHealth Group is one of The Motley Fool's top stocks. Although the health insurer doesn't rank at the top of my list, the Fool has a great history of picking stocks. PDL Biopharma also isn't one of my favorites, but the stock's valuation is intriguing.

My view, though, is that there are better choices than Envision Healthcare and Encompass Health. AI systems are designed to detect patterns that humans normally wouldn't spot, so maybe Equbot's IBM Watson application sees more than I see with these two stocks. For now, though, I think I'll stick with picking my own stocks.

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Keith Speights owns shares of AbbVie. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.