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Have £3k to invest? 3 healthcare stocks I’d buy for 2020

It’s not always easy to identify sectors with the potential to deliver long-term growth.

But I think it’s pretty safe to believe that the healthcare and pharmaceutical sectors will continue to expand as the world’s population ages, emerging markets become wealthier.

I’ve increased my portfolio’s weighting to this sector over the last year and plan to maintain this exposure in 2020. In this article I’d like to take a look at three London-listed stocks I rate as top healthcare buys for the year ahead.

Hidden value

My first — and biggest — pick is FTSE 100 pharma group GlaxoSmithKline (LSE: GSK). This well-known company has for many years operated with a diverse product portfolio including consumer healthcare products and specialist medicines.

This structure attracted critics who said that the group lacked focus. Chief executive Emma Walmsley appears to share this view. Less than three years after taking charge in April 2017, she’s now masterminding a process that will see the company split itself into separate consumer and pharma companies over the next three years.

The GSK share price has responded well to these plans and climbed 19% last year, beating the FTSE 100. I feel optimistic about this stock too. In my experience, splitting a company into two smaller, more focused businesses often improves the performance of both units.

Even after last year’s gains, Glaxo still looks reasonably priced to me on less than 15 times earnings, with a 4.5% dividend yield. I remain a buyer.

A small-cap winner?

My next pick is small-cap firm Medica Group (LSE: MGP). This company provides outsourced radiology reporting for NHS hospitals. Essentially, Medica recruits qualified radiologists and provides them with hospital-grade workstations. They can then provide scan reports remotely, including out-of-hours.

According to the company, it provides more than 1.3m reports annually for more than 100 NHS Trusts. I think it’s fair to say that it’s a market leader — presumably the NHS couldn’t manage without this service.

It’s certainly a profitable, fast-growing business. Medica’s turnover has increased from £9.5m in 2013 to £39m in 2018. The firm’s operating profit margin has averaged 21% during this time and it’s largely debt-free. The shares rose by 30% last year and now trade on 17 times 2020 forecast earnings, but I think this is a fair price for a highly profitable, growing business.

Profit from an ageing population

In most developed countries, populations are ageing. Birth rates are lower and people are living longer. Demand for joint replacements seems likely to keep rising, which should help FTSE 100 firm Smith & Nephew (LSE: SN).

The Smith & Nephew share price suffered some turbulence last year when it emerged that newly-arrived chief executive Namal Nawana was to quit after 18 months due to a disagreement over what he should be paid.

However, a new CEO was appointed promptly and the firm’s trading performance remained solid, with sales expected to have risen by 4.3% in 2019. Analysts are projecting a modest increase in profit for 2019, with a bigger 8% increase predicted for 2020.

Shares in this firm rarely look cheap. But they’ve doubled since 2014 and I believe continued growth is likely. For long-term investors, I think it’s worth paying 22 times forecast earnings to own a slice of this business.

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Roland Head owns shares of GlaxoSmithKline and Medica Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.