The Motley Fool

What’s the best healthcare stock for me?

If you’re an investor like me without a stake in this sector, buying your first healthcare stock can be difficult. There are so many different types of company, and so many different areas to focus on that it can be impossible to know where to look. I have done my best ostrich imitation for the past couple of years (buried my head in the sand) as I’ve bought finance, alternative energy, mining and infrastructure stocks, shopping centre giants and oil/gas producers – anything other than the swirling morass of healthcare stocks.

It’s long past time that I learned about (and bought) a healthcare stock, and there’s no time like the present. First things first: What do I want? Do I want a health insurer like NIB Holdings Limited (ASX: NHF), or a private hospital operator like Ramsay Healthcare Limited (ASX: RHC)? How about pathology operators Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY), who also operate a number of GP practices? I could buy specialist medical imaging company Capitol Health Ltd (ASX: CAJ), liver cancer treatment provider Sirtex Limited (ASX: SRX), or sleep apnoea-device manufacturer ResMed Inc (CHESS) (ASX: RMD). Or there are the elephants in the room, hearing aid manufacturer Cochlear Limited (ASX: COH) and blood plasma provider CSL Limited (ASX: CSL).

Motley Fool staff member Mike King is excited about his latest find, Lifehealthcare Group Ltd (ASX: LHC), while contributor Tim McArthur thinks aged care provider Japara Healthcare Ltd (ASX: JHC) has real potential. Finally there is a raft of pharmaceutical and biotech companies and pseudo-medical healthcare stocks such as dentistry company 1300 Smiles Limited (ASX: ONT).

From a healthcare stock, I want solid earnings, a good, growing dividend and exposure to sectors with increasing demand. Ideally this share would tap at least one of two trends I think are going to become the biggest drivers of health services demand in the coming decades; an ageing population, and obesity.

I’ve narrowed my list to seven companies; LifeHealthcare, NIB Holdings, Japara, 1300 Smiles, Primary Healthcare, ResMed and Capitol Health. Capitol Health and ResMed are excluded because their dividend is too small, while 1300 Smiles is ineligible because I think its revenues from the older generation will shrink over time rather than grow.  Likewise NIB Holdings (insurance) is out because its exposure to an ageing/obese population is too indirect.

Foolish takeaway

My final decision out of LifeHealthcare, Japara and Primary Healthcare was LifeHealthcare. Its recent half-yearly report showed before-tax earnings growth of 12.5%, marginally better than predicted in the prospectus. It has been trading pretty close to its issue price despite the recent results, and should pay a good dividend. Japara was a close second, however it is more expensive based on both P/E and price, and is also a recent IPO so lacks the advantage of having met its six-month forecasts.

By and large though, any of the companies mentioned in this article would make a solid investment depending on what you are looking for. Australian investors do not lack for choice in the healthcare sector!

5 stocks under $5

We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.

And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!

*Extreme Opportunities returns as of June 5th 2020

Motley Fool contributor Sean O’Neill owns shares in LifeHealthcare.

Related Articles...