One of the key principles of investing is buying low and selling high, or perhaps buying low and holding forever.
Buying low is easier said than done when there are literally thousands of businesses to choose from. When does price become the most relevant factor to buying a company?
To make that choice easier, I think it's important to have a watchlist of companies that you're interested in. Some investors have a watchlist of 10, some 50, some 100 or more.
Personally, my watch list has around 40 businesses on it at the moment. Once you have your list you can keep watch for when one of your targets becomes a lot cheaper, making the perfect time to 'buy low'.
This happened to two stocks I was monitoring recently – Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO).
Healthscope disclosed that in the September 2016 quarter it didn't have any growth in patient numbers. If patients don't increase then the profit won't increase compared to last year.
The market reacted very negatively to this news, sending Healthscope shares down 26% in less than two weeks. Ramsay shares, being a similar business to Healthscope, were also sold down and they declined by 11% in the same two weeks.
This was unfortunate for shareholders, but I think it presented a great opportunity to buy both businesses at discounted prices. These two companies are rarely ever cheap (compared to the rest of the market) because the healthcare sector is seen as one of the most defensive industries and hospitals could be some of the best businesses in the industry.
The share prices of both companies have recovered somewhat over the last week, but both are still at a good price in my opinion.
I think there is a strong chance Healthscope will report growing patient numbers again and the share price will recover. Healthscope reports on 22 February 2017 which could be the catalyst for a price recovery.
When you consider how many more Australians will need the services of hospitals in the future (thanks to the aging baby boomer population) then profit growth for these two hospital providers over the coming years is very likely.
Both of these operators also have growing overseas operations which provide good revenue diversification and more avenues to grow.
The main risk is government funding cuts, but considering the government wants to reduce the reliance on public hospitals, it's quite likely that it will prioritise influencing patients to go to private hospitals.
Time to buy?
I think now is the right time to buy these two stocks before they report in February.
Healthscope is trading at 20.4x FY17's estimated earnings with a dividend yield of 3.15%. Ramsay is trading at 26.8x FY17's estimated earnings with a grossed up dividend yield of 2.4%.
If you were to only choose one, I'd go for Healthscope because it's trading at a cheaper multiple. If you aren't tempted by these, you should consider buying our number one dividend stock before its share price shoots up again.
