Thanks to Obamacare, investors have been overly upbeat about the dramatic exuberance seen of late in the U.S. healthcare sector. But it’s time we question the rationality of this tremendous upsurge. More specifically, is everything a boom out here or is it just a bubble?

Healthcare stocks have skyrocketed 136% in the last 5 years, the finest performance of any sector in this period. Although the broader market indexes have hit their all-time highs during this period, the pace of increase in healthcare stocks makes the S&P 500’s gain (73%) look like child’s play. What's more impressive is that even in this phase of massive global sell-offs, the sector has not only held its own but also maintained a stable uptrend.

"You really have some powerful long-term tailwinds, including innovation and the aging of the population which can continue to drive the stocks higher," according to Marshall Gordon, senior research analyst at ClearBridge Investments.

While instances of innovations are embodied in Gilead’s (GILD - Analyst Report) blockbuster hepatitis C virus drugs, Harvoni and Sovaldi, which have occupied the market in a controlling way leading to the rise in the stock price to a ‘never-before’ level, we can also find the healthcare stock index behavior absolutely rational when we consider the much talked about reforms that have opened access to healthcare services for many an American.

The “Disputers”

There are some economists belonging to the opposite camp. They believe that the contraction has already started to creep in from late 2014, especially in the field of biotech. Economic analyst and Forbes contributor Jesse Colombo asserts that, “Though everyone is aware of the perpetually rising cost of healthcare, virtually nobody has connected the dots and realized that healthcare has become the ultimate bubble that will put the housing bubble to shame.”

These economists believe that the affordable care act has already driven the stocks to their maximum potential and even beyond, not always supported by sound fundamentals. The pendulum is now gathering momentum to swing in the other direction.

They’re apprehensive about rising healthcare costs to an unrealistic level, outstripping wage growth and the rate of inflation. This has forced many Americans to back out from enrolling themselves under incredibly expensive health insurance benefits. It has resulted in reduced doctors’ visit even for essential treatments.

No discussion on the healthcare cost racket is complete without mentioning the overpaid treatments of American doctors and of course the hospitals. The profits for hospitals have hit the roof in recent years by overcharging insurers and patients alike. Although, the CBO (Congressional Budget Office) has recently asserted about health insurance subsidies and the rising per-beneficiary cost of healthcare that will boost healthcare spending over the next decade, the near-term outlook is still bleak.

Time to Run Away?

In the face of such odds, is a massive sell-off in the cards with the sector approaching an absolute bear territory? Before we scurry in panic let’s realize that there are no dearth of drivers for the space. The merger and acquisition trend, encouraging industry fundamentals, promising new drugs, growing demand in emerging markets, ever-increasing healthcare spending and Obamacare play major roles to make it a lucrative bet over the long term.

The Winning Strategy

We have shortlisted healthcare stocks that have impressive yet sustainable growth prospects.

In order to do that, we used our new style score system and shortlisted those carrying a Growth Style Score of ‘A’ or ‘B.’ Our Growth Style Score condenses all the essential metrics from the company’s financial statements to achieve a true sense of the quality and sustainability of its growth. Our research shows that stocks with a Growth Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 (Strong Buy) or #2 (Buy) offer the best investment opportunities in the growth investing space.

Finally, we zeroed in on those which have a long-term expected EPS growth rate of 15% or more.
 
Here are the four stocks that match these parameters:   

Regeneron Pharmaceuticals, Inc. (REGN - Analyst Report)
 

This Tarrytown, NY-based biopharmaceutical company works to bring medicines for the treatment of serious medical conditions. The company’s commercialized medicines, which are popular in the market, are for eye diseases, high LDL cholesterol and a rare inflammatory condition. It currently has candidates in development in other areas of high unmet medical need, including oncology, rheumatoid arthritis, asthma and atopic dermatitis. The company anticipates better-than-expected growth in Eylea sales in the coming quarters that would boost the top line further.

Investors can count on the stock because it has the top combination – a Growth Style Score of 'A' and a Zacks Rank #1. Its long-term expected EPS growth rate is pegged at an impressive level of 44.29% versus 17.79% for the industry average showing huge long-term potential. For the current year, the company has a year-over-year EPS growth estimate of 29.86% (industry average 5.6%). Positive earnings estimate revisions over the past couple of months are encouraging too.
 
Gilead Sciences Inc. (GILD)

As stated earlier, this leading biopharmaceutical company scored well with its blockbuster HCV drugs, Sovaldi and Harvoni, which were well received in the market. Besides, Gilead's product portfolio and pipeline of investigational drugs are extremely impressive with treatments for HIV/AIDS, liver diseases, cancer, inflammatory and respiratory diseases and cardiovascular conditions. Strong performances from these products could lead to better-than-expected revenues.

This Zacks Rank #1 company boasts a Growth Style Score of ‘B’ and is expected to grow at a rate of 51.58% this year (compared with the industry growth rate of 5.6%). Its long-term expected EPS growth rate looks impressive at 42.49% (17.79%). Projected sales growth (for the current fiscal) is also impressive at 25.05% (9.02%). Moreover, positive earnings estimate revisions over the last two months should get reflected in the stock price.

Thermo Fisher Scientific, Inc. (TMO - Analyst Report)

Headquartered in Waltham, MA, this scientific instrument maker has promised to reach a new level with the company’s $13.6 billion acquisition of Life Technologies. The transaction has helped the company to reach a milestone in Specialty Diagnostics and applied testing markets. The company’s strong cash position and focus on emerging markets are also encouraging.

The company’s long-term expected EPS growth rate of 16.7%, compared to the industry average of a mere 9.5%. The growth potential of this Zacks Rank #2 stock is further emphasized by its Growth Style Score of ‘B.’

Cyberonics Inc. (CYBX - Analyst Report)

This neuromodulation device maker is a big name in the huge and growing market of refractory epilepsy and treatment-resistant depression (TRD). We are also looking forward to the company’s impending merger with Sorin which is expected to enhance revenue growth and drive cash flow. LivaNova, the new holding company post-merger, will have several exciting opportunities focused on three multi-billion dollar product categories: heart failure, sleep apnea and percutaneous mitral valve.

With a Zacks Rank #1, Cyberonics has long-term expected EPS growth rate of 21.6%, compared to the industry average of only 9.5%. Further, it has a Growth Style Score of ‘B.’ Positive earnings estimate revisions over the past couple of months also hold promise. The company’s sales are projected to grow 11.8% this year, which is a lot more than the 5.9% growth expected for the industry on the whole.

Bottom Line

The growth story of U.S. healthcare industry can’t be compared to any kind of asset bubble. Albeit, it has all major bubble components including an impressive price surge, soaring profits and decreasing consumer affordability on highly overpriced product. But there is also another side to this story, where we see the sector doing phenomenally well and where investors can still enter the market and make money.