These 2 healthcare stocks are odds-on winners

These overlooked stocks won’t stay cheap for long

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Healthcare stocks have been an excellent place to invest over the past five years. The S&P/ASX 200 Health Care Index (ASX:^XHJ) has returned 84% over the past 60 months, compared with only 44% for the ASX All Ordinaries Index (ASX:^XAO) and a terrible negative 4% return from the S&P/ASX 200 Metal and Mining Index (ASX:^XMM).

In addition to being exceptional companies in their own right, investors are drawn to healthcare companies due to the steadily increasing expenditure on medicines and diagnosis in developed countries, and the rapid growth and huge potential in developing countries.

Some companies, like CSL Limited (ASX: CSL) appear to be a little expensive at current prices, but the following two stocks could be huge winners for investors over the next five years.

Primary Health Care Limited (ASX: PRY) has been one of the poorest performing larger heath care stocks of the past five years. The five-year return of -12% is surely a sore spot for long-term investors, however the company is now trading on a forward price-to-earnings (PE) ratio of just 13 and a dividend yield of nearly 4.5%.

Primary offers patients diagnostic imaging technology, pathology laboratory services, and health technology software, as well as operating day surgery and eye clinics.

Earnings and dividends are expected to grow by around 10% by FY16, however the share price has been constrained by the Federal Government’s decision to implement a GP co-payment. The initial reaction has been poor, but many analysts now don’t appear too concerned by the potential impact, citing the relative cheapness of the stock.

The second company is one that has been heavily sold down, perhaps unfairly, and could see a huge rebound if developments are positive from here onwards. Acrux Limited (ASX: ACR) shares have been hammered from just over $4 in early-2013 to $1.10 currently.

The reason is that the company’s most important product; its testosterone treatment Axiron; could face problems in the US if the local Food and Drug Administration conclude that there are relevant links between testosterone treatment and cardiac problems and strokes. At present, the FDA has noted that the benefits outweigh the risks, but investors are still worried.

Acrux is trading on a forward PE of around 10 and a potential dividend yield of above 6% depending on profit results. The company and some investors are bullish, however it is definitely a higher-risk proposition.

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Motley Fool contributor Andrew Mudie does not own shares in any companies mentioned. You can find Andrew on Twitter @andrewmudie

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