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3 reasons health stocks rock and 3 stock ideas

Over the last five years, the S&P/ASX 200 Health Care Index (ASX: XHJ) has returned an impressive 90%, compared to a strong return of 46% for the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO).

Not only have healthcare stocks outperformed over the last five years (as the chart below demonstrates)…

Source: Google Finance

…but this outperformance is likely to continue over the next five years.

Here’s why:

1) Healthcare is non-discretionary. Even those living frugally will be willing to spend on healthcare, whether it be to stay alive or ease discomfort.

2) As the population ages it will have greater need for healthcare, and a greater proportion of the ailments will be ongoing, rather than curable in a finite timeframe.

3) Plenty of companies within the healthcare industry (broadly) can generate sticky revenue. Patients build trust with their doctors, and are unlikely to change them until they pass away. If medicines are working, they will continue to be used. Professionals and institutions are unlikely to change service providers or product suppliers for minor benefits, as the disruption is too great.

For blue-chip exposure to healthcare, it’s hard to go past Cochlear Limited (ASX: COH), which manufactures (and sells) hearing implants. The market is currently worried that Cochlear’s margins are under threat from competition, but the company has just launched its latest product, the Nucleus 6, and there is a strong chance that its release will improve sales for the company. Another favourite of mine is ResMed Inc. (Chess) (ASX: RMD), which sells the S9 sleep therapy system to treat sleep apnoea. ResMed is sure to grow sales as it expands internationally and populations age. Obesity is a major cause of sleep apnoea as well, so lifestyle trends are also driving demand for the company’s products.

Personally, I prefer to invest in smaller growing companies such as Azure Healthcare Ltd (ASX: AZV) – a company I hold in my portfolio. Azure makes both the hardware and software components for hospital monitoring systems. Last month I complained that CEO Robert Grey had failed to get back to me, but it turns out he had made the decision not to talk with analysts because the company had received a takeover proposal. Azure Healthcare shares are up 420% in the last year, and Grey attributes the turnaround to “all the dedicated staff within the business.” The team has boosted sales so much that the company will make record shipments in May 2014.  It’s fair to say I have a fast-growing admiration for the company (and a belly full of humble pie).

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Azure Healthcare.