sectors - may stocks to watch

3 Stocks to Buy in May for the Next Hot Sector

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May Stocks for the Next Hot Sector You Should Not Miss

We were early to the trade on the rebound in energy and financials stocks for our 2021 Bow Tie Nation portfolio with an average return of 83% in the four stocks added. But it’s time to move on and I’ve found the next rebound stocks to watch. In this video, I’ll show you why healthcare stocks could be the breakout winners this year and three stocks I’m buying right now. We’re talking stocks to buy in May, today on Let’s Talk Money!

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Energy Stocks Takeaways

Our Bow Tie Nation portfolio on Stockcard is up 32% and beating the market by nearly 20% this year. Shares of our energy stocks like Diamondback Energy, ticker FANG, and Devon Energy, ticker DVN, jumped 54% and 155% since adding them in October. Shares of Citigroup are up 69% and Wells Fargo is up 54% since December.

sector - may stocks to watch

But the momentum has slowed for stocks in the energy and financials sectors. The sector tracker here shows stocks in the energy sector have actually posted a loss over the last month and financials have underperformed the broader market.

Fortunately, I’ve found the next hot stock sector that could be taking over from here.

Looking at Healthcare Stocks as Strong Players

Those of you in the Nation know I’ve been following healthcare stocks for a few months. Shares of CVS were one of the first to add to our stock portfolio, now up 30% since October. I also added shares of health insurer Anthem, ticker ANTM, now up 40% and beating the market by 11% since November.

The idea has been that, as hospitals and other healthcare providers get back to offering those higher-margin services, then profitability could shoot higher this year. As the companies in the healthcare sector return to business as usual instead of using all their resources to fight COVID, these will be the stocks to buy for your portfolio.

And we got our first confirmation of that with the earnings report of Johnson & Johnson last month. With its breadth of segments in healthcare, from medical devices to pharmaceuticals, supplies and over-the-counter products…there is no better stock to watch than JNJ for a clue into the healthcare sector.

Johnson & Johnson reported a strong first-quarter earnings with 8% sales growth and 12.5% growth in earnings per share over the year but it was what they told us in the specific segments that has me excited for healthcare stocks.

The company reported 11% growth in its medical devices segment even with elective procedures still low to return in Europe. Sales at the pharmaceuticals unit were up 10% to over $12 billion. In fact, all this was so good that management increased its 2021 sales and profit targets.

I’m so confident in the rebound for healthcare stocks that I’m adding three to the portfolio in May. I’ll show you the upside in each of those stocks, my price target and catalysts for long-term returns.

We won’t be doing a review of the portfolio this month because I want to get to those three stocks I’m adding. I’ll leave a link to Stockcard in the video description. Click through and then go to Portfolios in the top menu, you’ll find the Bow Tie Nation portfolio in this Stock Picks section. It’s free to follow and you’ll get email notifications whenever I buy or sell from the portfolio.

As a special bonus, I’ve negotiated an exclusive discount for everyone in the community. Use the promo code bowtienation for an exclusive discount beyond the free trial.

Now we’ve already got exposure to healthcare retail and insurance in the portfolio so this month, I want to diversify a little more across the sector. Pharmaceuticals have been hit lately so I think there’s some value there. Hospital services is really where we see the rebound play coming and one of the biggest trends over the next decade is going to be Healthcare Information Technology so I want to put something in the portfolio there as well.

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I’ll be adding the three stocks to our portfolio but if you just want broad exposure to the theme, I want to highlight a few exchange traded funds you can buy that will also follow prices higher.

First is the broadest of the three, the iShares Health Care Select Sector SPDR, ticker XLV, with a 23% return over the last year and an expense ratio of just 0.12%.

The fund invests broadly across the sector with 62 stocks in equipment and supplies, pharmaceuticals, services and biotech. A list of the top ten stocks is a who’s who of the biggest companies in the space including JNJ, Pfizer and Medtronic.

The fund probably isn’t going to blow the doors off on returns but offers a 1.5% dividend yield and will track the sector.

More of a rebound play would be in shares of the iShares Biotechnology ETF, ticker IBB.

The fund holds 279 companies in biotechnology and pharmaceuticals with a strong concentration, about 80% of the fund, in biotechnology companies.

The fund is up 25% over the last year but has fallen 9% since the February peak on that selloff in high growth names so this one could see some of those returns come back if healthcare does well this year.

Last here before those individual stocks to buy is the iShares U.S. medical devices ETF, ticker IHI, and its 40% return over the last year.

Medical equipment companies actually did relatively well last year but could surprise even higher this year and next. Hospitals will be flush with cash on a return to elective services and might need to upgrade equipment that has worn down over the last year.

The fund holds shares in 64 companies within the devices and tools segment of healthcare with some great names here like Abbot Labs, Medtronic and Intuitive Surgical.

Those three funds are going to give you upside to the theme if you just want broad exposure without picking stocks. Now I want to highlight those three stocks I’m buying for the portfolio this month.

3 May Stocks to Include in the Portfolio

First here is Teva Pharmaceuticals, ticker TEVA, the largest generic drugmaker in the world with one-in-nine prescriptions filled in the U.S.

Teva has been under pressure for the last few years on patent expirations, litigation over opioids and the huge debt it took on for acquisitions but the shares have found a bottom over the last year. It’s down 15% from the recent peak so I think you’ve got some immediate upside potential along with longer-term growth.

Management aggressively cut operating expenses by $3 billion in 2019 and is working to the company’s debt leverage target. The cuts really helped last year on weaker sales during the pandemic and you can see here the affect on profitability with the operating margin increasing from 24% to nearly 27% for this year’s target.

Even after the cuts and closing non-performing facilities, Teva still has the scale advantage to fund a strong pipeline. Management is targeting between 200 to 350 new drug filings a year and more than 20 product launches. That will provide the cash flow to keep paying off debt.

That’s important because right now, the biggest overhang on the stock is just investor sentiment over too much debt. It’s why the shares only trade for 0.7-times sales versus a valuation of 2.8-times sales for GlaxoSmithKline, because investors just aren’t willing to pay more for Teva. Move the debt leverage in the right direction though and you improve sentiment and the valuation.

The company already generates $2.1 billion in free cash flow and two of its branded drugs, Austedo for Huntington’s disease and Ajovy for migraines continue to grow revenue by double-digits to potential blockbuster status.

The average analyst target is for $12.26 a share, about 15% from here, but I like it back to that recent high of $12.50 this year and eventually to $13 or $14 a share over the next couple of years.

Next is Fresenius Medical, ticker FMS, the largest dialysis network in the world with over 4,000 centers and products serving half of all dialysis patients globally including treatments in 50 countries. The majority of its revenue is generated in North America which makes me think it can recover from the pandemic-driven weakness faster. It will take more time for EU and emerging business to come back but U.S. sales should do well this year.

The pandemic meant increased costs for PP&E for its workers as well as a slowdown in patients starting dialysis treatment. That sales weakness is expected to continue for much of this year but should start turning in the fourth quarter or sooner and  there’s a good chance that drives the stock price in anticipation.

Even against the weakness, the company still met its 2020 financial targets and is planning its 24th consecutive dividend increase for May, and paying a 1.8% yield.

Management confirmed its 2025 targets and the operating cost cuts it’s deploying now, along with cuts in PP&E costs when its no longer needed, that’s going to significantly drive profitability.

The average analyst target is only for $40.62 a share but I think the shares could be worth $45 each over the next year on top of the dividend. It’s trading for just 16-times earnings which is below the valuation on similar stocks and makes it a good value play.

Teladoc Health, ticker TDOC, is my growth stock of the group and easily the riskier of the list.

Teladoc is the global leader in virtual healthcare with a provider network that covers 70 million U.S. patients and a billion member data points from traditional telehealth to remote monitoring and next generation primary care.

Obviously last year was huge here, like two years of growth in one, but the company was already growing at a solid rate. Membership growth has grown 40% annually since 2016 and 10.6 million patient visits last year.

Revenue doubled last year and 80% of that is from recurring services so I like it for the stability even if growth for telehealth slows from last year’s faster pace. Longer-term, telehealth and virtual care is the future but I think the data is really the undiscovered value here, processing all that patient data for analysis and research.

Of course the risk here is that the shares are already up 227% in the last two years. Even after that 35% selloff in the February drop on growth stocks, the shares still trade for 26-times on a price-to-sales basis so it’s expensive here but a stock that is definitely growing into that valuation.

The average analyst price target for Teledoc is $255 a share, which would be a 34% return from here and even that is still 15% below the price reached in February. So some strong near-term upside potential here but also could be one of your best stocks for the next decade.

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