Consider the following scenario:
On September 9 2000, you decide to purchase 10,000 Ramsay Health Care Limited (ASX: RHC) shares for $1.22 at a total cost of $12,200. You then decide to hold on to this parcel of shares for the next 15 years. By now, not only would have you received tens of thousands of dollars worth of dividends, but your once humble parcel of shares is now worth more than $600,000!
This is just one example of how long-term investing can create true wealth. This example also highlights the benefits of identifying growth stocks before they become blue-chip stocks that everybody wants to own.
Here are two small cap healthcare stocks that I have no doubt will grow into much larger companies than they are today (although they probably won't grow quite as large as Ramsay Health Care!):
Capitol Health Ltd (ASX: CAJ)
Capitol Health is Victoria's largest community-based diagnostic imaging company and is the only ASX-listed company that focuses purely on diagnostic imaging.
As the graph below shows, it has an enviable track record when it comes to revenue and profit growth.
Source: Capitol Health Presentation
Capitol Health has been growing organically but its major growth driver has been acquisitions. The diagnostic imaging sector is compromised of many small operators and Capitol Health has been at the forefront in consolidating the sector. The company carried out four acquisitions in FY15 and further acquisitions are planned for FY16.
Importantly, Capitol Health has recently broadened its geographical spread and is now focusing on expanding its network into the much larger New South Wales market. Although the expansion is still in its early stages, success in New South Wales could lay the foundations for expansion into other states in Australia.
Capitol Health reported a 48% increase in underlying earnings per share (EPS) for FY15, but it appears the market had higher expectations, with the share price steadily decreasing since the result was announced.
The shares are currently trading at around 24x FY15 earnings and considering Capitol Health is likely to post another record result in FY16, it appears now may be a good opportunity to pick up some shares at around the 60c level.
The long-term outlook for the diagnostic industry is strong with the medical community focused on early detection and prevention.
Lifehealthcare Group Ltd (ASX: LHC)
Lifehealthcare is a leading distributor of high end medical equipment to a growing number of surgeons throughout Australia and New Zealand.
The company has been listed for just over 18 months but has already demonstrated its ability to grow earnings organically as well as through acquisitions.
Lifehealthcare's FY15 result was broadly in line with expectations with revenue growth of 13.8% and EPS increasing by 10%.
Although this level of growth was not as spectacular as some other companies, the company is expected to grow strongly over the next few years as the benefits of recent acquisitions are realised. In addition to this, the underlying fundamentals of the medical device sector remains strong with the number of surgical procedures continuing to increase each year along with improvements in technology.
From a valuation point of view, the shares are trading at around 14x FY15 earnings and investors can expect to receive a dividend yield of more than 5%. At current prices, it might be worthwhile for investors to take a closer look at Lifehealthcare as the company has a bright future ahead of it.
