Should you sell “expensive” healthcare shares and buy “cheap” oil shares?

I read an interesting article recently that attempted to prove that, based on relative expensiveness, now could be the ideal time to sell down some of your expensive healthcare and China-exposed stocks and buy oil shares and iron ore miners.

A Comparison

The writer looked at the experience over the last 12 to 18 months of being a resources investor compared to an investor in companies like a2 Milk Company Ltd (Australia) (ASX: A2M), Bellamy’s Australia Ltd (ASX: BAL) and Ramsay Health Care Limited (ASX: RHC).

All three companies have handily beaten the ASX 200 over the last 12 months with A2 returning 198%, Bellamy’s 694% and Ramsay an underwhelming 8%, and most definitely outperformed Australia’s struggling resources companies like Woodside Petroleum Limited (ASX: WPL) and BHP Billiton Limited (ASX: BHP) that have returned between negative 20% and negative 50%!

Is it time to buy resources stocks?

Consider this, Woodside is trading on a trailing price to earnings ratio of 7.4 and dividend yield of 10.6%. Bellamy’s numbers, by comparison, are 138 and 0.21%. Furthermore, Ramsay is 33.3 and 1.65%, while BHP is 15.6 and 11.6%.

Based on these numbers alone you’d have to say that buying BHP and Woodside is simply a no-brainer!

Hold on, there’s more to consider here!

One of the biggest advantages of being a Foolish investor is that we get education on how to identify good, and not so good, opportunities. We look for companies with strong competitive advantages over peers, the ability to control the price of the goods they sell, and a healthy future that is (at least) moderately predictable.

BHP and Woodside do not possess all three of these features. While they do have a level of competitive advantage over their peers, because their cost of production is lower, they have no ability to control the price of oil or iron ore, and as such their future is nearly impossible to accurately predict. As a result, these companies aren’t on the hit list of must-watch stocks. The one below is though:

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Motley Fool contributor Andrew Mudie has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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