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5 Top Medical Services Stocks to Beat COVID-Led Industry Challenges

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The COVID-19 crisis has drastically transformed the fortune of the medical services industry. Since the onset of the pandemic, with digital healthcare treatment becoming indispensable, the industry has been witnessing significant demand for telemedicine-focused online medical and AI-powered technologyservices. Companies in the remote healthcare space have seen their stocks rally amid the economic volatility. Avantor, Inc. (AVTR - Free Report) , Eurofins Scientific SE (ERFSF - Free Report) , GoodRx Holdings, Inc. (GDRX - Free Report) , Apollo Medical (AMEH - Free Report) and COMPASS Pathways plc (CMPS - Free Report) are a few such stocks. However, at the same time, the resurgence of new COVID-19 cases has dealt a blow to manual workforce and healthcare infrastructure as patients are once again deferring their non-essential procedures and hospital stay.

Industry Description

The Zacks Medical Services industry comprises third-party service providers and caregivers appointed by core healthcare companies for economies of scale. The industry includes pharmacy benefit managers, contract research organizations (CRO), mobile and wireless medical technology companies, third-party testing labs, surgical facility providers, and healthcare workforce solutions providers among others.

Over the past few years, the healthcare industry has strategically moved from volume- to value-based care. This changing pattern of care calls for efficient and better-quality facilities, thus gradually increasing the need to appoint specialized external service providers.

In recent times, biotechnology and pharmaceutical companies have often been seen outsourcing clinical development and data-solution services to improve quality of medical care at competitive costs. With growing importance of effective healthcare management, the medical service industry has become an integral part of the modern healthcare mechanism.

4 Trends Shaping the Future of the Medical Services Industry

COVID-Led Procedure Deferral May Continue: Undoubtedly, the medical service sector’s overall response to the pandemic has been resilient and the recent vaccination rollouts appear to be the light at the end of the tunnel. However the fast-mutating SARS-CoV-2 through its constant process of bringing in new virus variantsis once again raising questions about the sustainability of the ongoing economic rebound process. From November till February, the resurgence of the new wave resulted in limited and regional stay-at-home restrictions. This majorly deferred non-essential and elective procedures. If this situation recurs, it might once again impact the non-COVID healthcare infrastructure, pulling down their revenues.

Digital Revolution Amid the Pandemic: With an increase in the adoption of digital platforms within the medical device space, remote monitoring, robotic surgeries, big-data analytics, bioprinting, 3D printing, electronic health records (EHR), predictive analytics, real-time alerting and revenue cycle management services are gaining prominence in the United States. A June 2020 Digital Health Market report suggests that this market, valued at $106 billion in 2019, will grow at 28.5% CAGR through 2026. Various other reports suggest that companies that adopted artificial intelligence technologies witnessed a 50% reduction in treatment costs and also experienced more than 50% improvement in patient outcome. Amid the pandemic, this line of healthcare is becoming a major choice for contactless healthcare services.

In 2020, the Centers for Disease Control and Prevention asked healthcare service communities to increase the use of telemedicine. Added to this, the House passed an emergency spending bill, allowing Medicare reimbursement for telehealth during crisis. Further, the FDA approved the expanded use of remote patient monitoring technologies to minimize hospital visits, thereby reducing the risk of exposure to the virus. MedTech companies are currently collaborating with technology majors like Google, Apple and IBM to grow in this space.

Nursing Care Market Boom: With rising cognizance about the benefits of specialized medical caregiving, the need for healthcare workforce/staffing service providers has increased significantly. For example, the demand for nurses has increased manifold driven by the rising incidence of chronic disorders in the United States and is expected to be high in the days ahead. Going by a report published by WFMJ, the U.S. nursing care market size is expected to be worth $460 billion in 2020 and witness CAGR of 6% during 2020-2025.

New Technology Adoption: With a significant reduction in regulatory and tax burden on U.S. healthcare companies, the space is finally making progress in terms of technology adoption. This is creating opportunities for mobile and wireless medical technology companies. This apart, treatments are becoming less invasive with shorter recovery times, thanks to the specialized skills and advanced techniques of surgical facility providers. In the future, concepts like ‘bed less hospitals’ are expected to gain popularity. Currently, third-party laboratory testing providers and contract research organizations are also seeing a surge in demand, owing to the growing need for complex tests, services and clinical research.

Zacks Industry Rank Indicates Weak Prospects

The Zacks Medical Services industry falls within the broader Zacks Medical sector. It carries a Zacks Industry Rank #200, which places it in the bottom 20% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

We will present a few stocks that have the potential to outperform the market based on a strong earnings outlook. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Outperforms Sector, Lags S&P 500

The Medical Services Industry has outperformed its own sector but underperformed the S&P 500 over the past year. The stocks in this industry have collectively gained 21.6% during the said time frame compared with the S&P 500 composite’s rise of 45.3% and the Medical Sector’s 7% rise.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E), which is commonly used for valuing medical stocks, the industry is currently trading at 28.87X compared with the S&P 500’s 22.99X and the sector’s 23.17X.

Price-to-Earnings Forward Twelve Months (F12M)

 

Over the last five years, the industry has traded as high as 28.87X, as low as 10.52X, and at the median of 14.09X, as the charts below show.

Price-to-Earnings Forward Twelve Months (F12M)

 

5 Stocks to Buy Right Now

Below are five stocks within the Medical Services industry that have been witnessing positive earnings estimate revisions and carry a Zacks Rank #1 (Strong Buy) or #2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Avantor, Inc.:This company is a leading global provider of mission-critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries. It recentlyenhanced its bioproduction offering through several technology launches.

The company currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2021 earnings indicates a year-over-year rise of 8.9% while the same for revenues is expected to be 31.5%. The company delivered an earnings surprise of 18.7%, on average, in the trailing four quarters.

Price and Consensus: AVTR

Eurofins Scientific: The company is a scientific leader in food, environment, pharmaceutical, and cosmetics products testing and in agroscience CRO services. It is also one of the global independent market leaders in certain testing and laboratory services for genomics, discovery pharmacology, forensics, CDMO, advanced material sciences, and supporting clinical studies.

This Zacks Rank #2 company’s Zacks Consensus Estimate for 2021 revenues indicates a year-over-year surge of 46.2%.

Price and Consensus: ERFSF

 

GoodRx Holdings, Inc.: As a leading resource for healthcare savings, GoodRx connects consumers with affordable and convenient prescriptions and medical care, including telehealth, mail order prescriptions, doctor visits, and lab tests.During the pandemic, GoodRx’s new, affordable telemedicine services delivered prescriptions directly to homes and created more savings opportunities for prescriptions, medical care, labs and other healthcare services.

The company currently carries a Zacks Rank of 2. The Zacks Consensus Estimate for 2022 earnings and revenues indicate year-over-year surge of 42.6% and 36.5% respectively. The company delivered an earnings surprise of 22.9%, on average, in the trailing four quarters.

Price and Consensus: GDRX

 

Apollo Medical Holdings, Inc.: It is a physician-centric, technology-enabled healthcare management company. Leveraging its proprietary population health management and healthcare delivery platform, Apollo Medical operates an integrated, value-based healthcare model. The company is currently increasing its clinical expertise and delivery by investing in a proprietary technology platform.

The company currently carries a Zacks Rank of 2. The company has long-term historical revenue growth rate of 17.8%. For 2022, earnings growth expectation is pegged at 8.5%. The company delivered an earnings surprise of 125.3%, on average, in the trailing four quarters.

Price and Consensus: AMEH

COMPASS Pathways plc: This mental health care company is dedicated to accelerating patient access to evidence-based innovation in mental health.The company pioneered the development of a new model of psilocybin in therapy in which its proprietary formulation of synthetic psilocybin, COMP360, is administered in conjunction with psychological support.

The company holds a Zacks Rank of 2, at present. The Zacks Consensus Estimate for 2021 earnings indicates year-over-year growth of 43.1%.

Price and Consensus: CMPS

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