After a couple of weeks where the broad market experienced some weakness, the healthcare sector is showing considerable resiliency. Over the last month, the Healthcare Select Sector ETF XLV has been the second strongest sector in the market, behind just the energy market.

By scanning Zacks proprietary research I have identified three stocks I think will outperform over the near-term and possibly the long-term.

Along with the industry strength, Align Technologies ALGN, Eli Lilly LLY, and Cardinal Health CAH boast top Zacks Ranks, and various bullish catalysts.

Healthcare Sector Forming a Bull Flag

After moving sideways for the better part of two years, XLV has carved out a compelling long-term technical chart pattern. If XLV can breakout above the upper bound, it should signal the next major bull run in the healthcare industry and various stock components.

Align Technology

Align Technology is a leading medical technology company that specializes in the design, manufacture, and marketing of clear aligner orthodontic devices. The company’s flagship product, Invisalign, has revolutionized orthodontic treatment by offering an alternative to traditional braces.

Invisalign’s clear and removable aligners have gained popularity among patients seeking a more discreet and comfortable teeth-straightening solution. Align Technologies also provides digital treatment planning software and intraoral scanning systems to support dental professionals in delivering effective and personalized orthodontic care.

Align Technology enjoys a Zacks Rank #1 (Strong Buy), indicating upward trending earnings revisions. Current quarter earnings estimates have been revised higher by 5.6% over the last two months and are projected to grow 65% YoY to $2.25 per share. FY23 earnings estimates have been upgraded by 5.3% and are expected to climb 12.8% YoY to $8.75 per share.

Over the next 3-5 years EPS are expected to grow by an enviable 17.5% annually.

ALGN has also been forming a convincing technical chart pattern traders may want to keep an eye on. Just today, ALGN stock broke out from a bull flag which had been building over the last two weeks. So long as the price doesn’t trade back below the breakout level, Align Technology stock should continue higher.

Because of its impressive earnings growth, Align Technology trades at a premium valuation, and has for many years. Today, it is trading at a one year forward earnings multiple of 49.2x, which is well above the industry average of 20.7x, but still below its five-year median of 51x.

Eli Lilly

Eli Lilly, one of the world’s largest pharmaceutical companies has been on a tear this year, up 48% YTD, and for good reason. The drugmaker has been riding a wave of bullishness, as investors recognize multiple major drug development achievements. Eli Lilly has recently formed its own weight-loss drug, Mounjaro, to compete against the current, very hyped options Ozempic, and Wegovy. LLY’s drug is expected to have considerably fewer side-effects and be just as valuable.

Additionally, LLY drug developers have achieved breakthrough success in creating a new medication to treat Alzheimer’s. Late-stage trials for Eli Lilly’s Donanemab, showed a significant slowdown in memory loss and cognitive decline in older adults.

With treatments for two of the worst public health issues in the pipeline, analysts have significantly boosted earnings estimates for LLY, giving it a Zacks Rank #2 (Buy) rating. Current quarter earnings estimates have been revised higher by 20.1% and are forecast to grow 42% YoY to $2.81 per share.

Additionally, sales over the next two years are projected to grow in the high teens, and EPS are expected to climb 25% annually over the next 3-5 years.

Because of the incredible anticipation surrounding Eli Lilly, its valuation has rocketed higher over the last years. However, considering the incredible pace of growth expected in earnings, LLY shouldn’t have too much trouble growing into the premium valuation.

LLY is trading at a one year forward earnings multiple of 53.6x, which is above the industry average and its five-year median of 24x. It is also worth noting that LLY stock pays a dividend yield of 0.9% and has raised it by an average of 15% annually over the last five years.

Cardinal Health

Cardinal Health is a global healthcare services company that plays a vital role in the pharmaceutical supply chain. It is the second largest pharmaceutical distributor in the US and manufactures products such as single-use surgical drapes, gowns, and apparel among many others.

Cardinal Health stock has been forming one of the most powerful technical trade setups I have seen all year. Over the last six weeks, CAH has been building out an increasingly tight bull flag consolidation.

If the price can breakout above the $93.40 level, it should make a major move higher. Alternatively, if CAH loses the $92 level, the setup is invalidated, and investors can look for other opportunities.

Cardinal Health has also begun to see some slight upward earnings revisions, giving it a Zacks Rank #2 (Buy) rating. While current quarter earnings estimates have been revised higher by just 0.7%, they are expected to grow a whopping 41% YoY to $1.48 per share. Additionally, FY23 earnings are forecast to grow 13.2%, and FY24 to grow 14.2% YoY.

Sales are also projected to increase 12.5% annually to $203 billion, and EPS are expected to grow 13.5% annually over the next 3-5 years.

CAH is trading at a one year forward earnings multiple of 14.1x, which is below the industry average of 20.7x, and just above its 10-year median of 13.1x. Cardinal Health also has a dividend yield of 2.2% and has increased the dividend payment by an average of 1% annually over the last five years.

Bottom Line

I think that the healthcare industry offers some of the best opportunities in the market today, and the move higher could just be getting started. Keep an eye on these stocks, and the sector overall for the chance to pick up some market beating companies.
Eli Lilly and Company (LLY): Free Stock Analysis Report

Align Technology, Inc. (ALGN): Free Stock Analysis Report

Cardinal Health, Inc. (CAH): Free Stock Analysis Report

Health Care Select Sector SPDR ETF (XLV): ETF Research Reports

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Zacks Investment Research

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