Don’t buy Ramsay Health Care Limited until you read this

Ramsay Health Care Limited (ASX: RHC) remains an incredibly popular stock with investors. Over the past year alone shareholders have pushed the stock price up 30%, while over the last five years the price has jumped 310% and in the last decade the stock price has surged 749%! It’s a truly outstanding performance and sure beats the 56% gain in the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the last 10 years.

While the gains in share price can largely be considered justified given the growth rates the business has achieved there are reasons to be cautious. Firstly, the company now has a market capitalisation of over $9 billion and maintaining high growth rates could become harder. Secondly, the stock is trading on a very high multiple which leaves little room for error. Thirdly, until now there have been few other options available to investors wanting to gain exposure to the private hospital industry.

What’s changed?

On 28 July, fellow private hospital operator Healthscope Limited (ASX: HSO) is due to list via initial public offering (IPO) on the ASX. The market value of Healthscope at listing is expected to be between $4.4 billion and $3.8 billion, which implies the stock will float with a forecast FY 2015 price-to-earnings (PE) ratio of between 20x and 23x. In comparison, Ramsay is trading on a forecast PE of almost 24x (according to data supplied by Morningstar).

A better bet?

For investors looking for exposure to this profitable and growing industry sector, they will shortly have another investment option and may want to consider the relatively “cheaper” Healthscope over the “more expensive” Ramsay.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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