These healthcare companies may give you rosy cheeks of financial health

Healthcare stocks can be defensive plays as well as offer earnings growth.

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The healthcare industry offers investors a variety of opportunities in biotechnology, pharmaceuticals and healthcare service providers. When the stock market is down or headed that way, they can be defensive stocks for protecting portfolio returns and reducing volatility.

They can also be good growers because of their specialisation and general high demand by consumers. Some of the ASX’s best performers are in healthcare. Here are three companies that investors should know about to add that stability and growth potential to their portfolios.

Sigma Pharmaceutical Limited (ASX: SIP) is a pharmaceutical product full line wholesale and distribution company to pharmacy and grocery store channels. Some of its brands are Amcal, Amcal Max and Guardian.

Revenues are generally stable and net profits have been improving after the company had a net loss in 2011. The company carries no debt.

The changes in the government’s PBS reform may affect sales by reducing the cost of drugs, but consolidating its place in the industry could help mitigate that. The company has agreed to acquire Central Healthcare, a smaller distributor, which will increase its market share from 32% to 35%.

It has a PE of 15 and the dividend yield is 4.3%.

Sonic Healthcare Limited (ASX: SHL), the medical diagnostics company, just set a new all-time high of $18.10, returning to the price level last reached in October 2007. Its PE is 18.9 and the dividend yield is 3.6%.

Net profits have risen since 2011 and in its first half of FY2014, net profit was up 17.7%. A consensus of analyst forecasts indicates an expected annual rise in earnings above 10% over the next two years.

Greencross Limited (ASX: GXL) is a veterinary service provider with a growing network of facilities across Australia. In November, it announced a merger with Mammoth Pet Holdings Pty Ltd, which owns the Petbarn pet supplies store chain.

That will give them more exposure to pet owners and the possibility of cross-advertising services and products can help organic growth. From October 2011, its share price has climbed from about $1 to $7.80 currently. Its PE is 35.

The company is actively acquiring existing veterinary practices in a highly fragmented industry.

Since 2010, revenue has doubled, but full year 2013 net profits were down from 2012. In the first half of FY2014, it added about 21 sites, bringing the total to 231. Interim underlying net profit was up 28% to $4.4 million.

Foolish takeaway

I like Greencross because of the potential growth that a merger with a large petcare store chain can bring. As with any expanding network of stores, attention should be paid to how fast it is acquiring competitors and the earnings multiples it is acquiring them at. Growing too quickly can cause financial burdens.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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