Are these the 2 best long-term healthcare buys?

Whenever a sector has a strong run up, the natural question is for how much longer. The S&P ASX 200 Healthcare Index (ASX: ^XHJ) is up about 78% since March 2012. Healthcare stocks are generally defensive in nature, so as consumer discretionary spending increases and cyclical industries like housing and retail begin to rise, will investors begin to switch out of pharmaceuticals, healthcare providers and biotech companies?

Like all industries, you have to look past the general news and learn about how the individual companies can drive earnings.

One company that has been down while other industry peers are up is Cochlear Limited (ASX: COH). 2013 annual profit was down and first-half revenue suffered from the commercial market waiting for new product launches, as well as delayed regulatory approvals.

Now with the US Food and Drug Administration (FDA) approval finalised in March, the company’s new Nucleus Hybrid System hearing implants are ready for commercial release in the US, the company’s biggest market. In the second half of FY2014, the results of the first sales of the new launch should be seen.

The share price is $57.72 and its PE is 29. Its dividend yield is 4.4%.

Ramsay Health Care Limited (ASX: RHC) is a great example of steady earnings growth with underlying net profit increasing every year uninterrupted over the last nine years. Rather than being just a simple defensive stock, it is actually a fast grower that expanded its network of private hospitals both domestically and abroad.

Although net profit margins are low, annual earnings growth is usually in the high teens or early 20s. It recently acquired a network of hospitals in France, which may contribute to earnings for the first time in the second half. It plans to expand into Asia, with eyes on China’s healthcare sector.

The stock is at $45.98 with a PE of 28. It is down from a $50.56 high set in February. Its dividend yield is 1.7%.

Foolish takeaway

Technological developments sometimes can’t be held to a particular time frame because of regulation, so a short-term sell-off from delayed product releases could create a buying opportunity for Cochlear while sales from its new product launches are still unknown.

For Ramsay Health Care, it is like a growing chain store, so earnings growth can go on as it moves into new regions.

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

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