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Which are the best healthcare stocks to buy now?

As reporting season and February both draw to a close the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is showing a gain of 1.5% for the first two months of 2014. Meanwhile most of the major healthcare stocks have now reported and on the whole most have reported pleasing results. Despite their solid underlying operating performances some have under-performed the market.

The Outperformers

CSL Limited’s (ASX: CSL) share price is 3% higher this year. Its interim results showed a 3% gain in profit and a 5% increase in its interim dividend.

Ramsay Health Care Limited (ASX: RHC) has gained nearly 10% this year. The company reported 16% growth in underlying profit for the half and raised its dividend by 17%.

Sonic Healthcare Limited (ASX: SHL) is up 6% this year. Its December half-year results showed an 18% rise in profits and an 8% increase in the dividend for shareholders.

The Underperformers

Cochlear Limited (ASX: COH) has seen its share price decline by 1.5% in 2014. The company surprised the market with a 73% fall in profits largely due to the staggered launch of its newest device which effectively delayed sales. The interim dividend was raised 1.6%.

Primary Health Care Limited’s (ASX: PRY) share price has fallen 4% so far this year, despite reporting an underlying increase in profits of 13% and a 38% boost to its dividend. Importantly, Primary’s management reaffirmed guidance for the full year for earnings growth in the range of 7% to 13%.

ResMed Inc (ASX: RMD) has also suffered from a declining share price this year with the stock losing nearly 4%. The underlying performance of the company appears solid however with earnings for the 6 months to December increasing by 12%.

Foolish takeaway

The difficulty faced by investors is that the price of many of these high-quality healthcare businesses appears expensive. While paying-up for quality and growth is fine, overpaying can lead to sub-optimal returns. With many of the above stocks trading on lofty multiples, investors are probably best off keeping an eye on the “underperformers” list. From time-to-time, high-quality stocks such as these will underperform (for a multitude of reasons) and this can offer a great opportunity for fast acting investors to pounce.

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Motley Fool contributor Tim McArthur owns shares in Primary Health Care Ltd.

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