Should you buy the ASX’s top 4 healthcare stocks?

Is the recent share pullback an opportunity to get set in Australia’s largest health care stocks?

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Many investors have seen the biotechnology and healthcare stocks slammed across the world in the last few days.

According to the Wall Street Journal, even the analysts that cover the sector are perplexed. The NASDAQ biotech index tumbled 5.6% last Thursday, with no apparent bad news responsible. Since late Feb, the index has suffered a close to 20% decline, almost putting it in ‘market crash’ territory.

Here in Australia, the results haven’t been as bad, with Ramsay Health Care Limited (ASX: RHC) down 6.5% in the last month, CSL Limited (ASX: CSL) off 5.8% and Resmed (ASX: RMD) losing 2.3%. Cochlear Limited (ASX: COH) has dropped 1.6% while Sonic Healthcare Limited (ASX: SHL) has gone against the trend rising 0.5%. Between them, those five stocks account for more than 86% of the S&P/ASX 200 Health care index.

Taking a closer look at the top four stocks in descending market cap order, here’s how they stack up.

CSL has generated compound earnings per share growth of 13% over the past 5 years, and 38% growth in net profits over the last ten years. Despite the $64.60 price tag, CSL is trading on a 2015 financial year P/E ratio of 22.7. Return on equity (ROE) stands at 36.4% for last year. If the company can reproduce its last ten years’ performance over the next decade, there’s no reason why the share price couldn’t be multiples of what it is today.

Ramsay Health Care has grown earnings per share at an astounding rate of 25% over the past 5 years and net profit at 23% over the last decade.  Shares are currently trading on a prospective P/E ratio of 25.7. ROE for last year comes in at a decent 18.2%. At $46.56, it might look overpriced, but like CSL, Ramsay could well go on to deliver similar results in the next ten years, which would make today’s price look cheap.

Sonic is perhaps the cheapest in comparison to the other four, trading on a 2015 financial year P/E ratio of 16.6. But the company has managed to grow earnings at a compound rate of 18% over the past ten years. In 2004, Sonic generated 22 cents in EPS – by comparison, in 2015, analysts expect Sonic to earn 109 cents per share. ROE for last year was a slightly disappointing 12.7%.

Resmed’s earnings per share have compounded at 20% a year over the past ten years, and 24% over the last five. Return on equity was an admirable 19.2% last year, and the company is currently sitting on close to US$1 billion in cash, thanks to prodigious cash flows. The prospective P/E ratio for 2015 stands at around 15.8.

Foolish takeaway

Recent falls may be an opportunity to pick up shares in high quality health care companies on the cheap. These four stocks certainly have the runs on the board, and could well emulate that success well into the future.

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Motley Fool writer/analyst Mike King owns shares in CSL and Resmed. You can follow Mike on Twitter @TMFKinga

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