Should you buy these 4 health care stocks?

The health care and technology sectors must contain some of the best performing stocks over the past three to five years.

The strong tailwinds suggest both sectors should continue to outperform over the next few years too. An ageing population, increasing take-up of digital services, subscription video on demand, higher mobile use, roll out of the NBN, more retirees and older Australians, advances in health and technology. You name it – there are a plethora of reasons why health care and technology stocks are likely to thump the market.

But not all of them.

Investors still need to be selective.

Here’s my view on four of them…

Capitol Health Ltd (ASX: CAJ)

The diagnostic imaging company recently lost its Managing Director John Conidi after 8 years in the role. Capitol has had a troubled 12 months, with the share price tumbling 74% to just 13.7 cents currently. Profit downgrades and net losses are primarily to blame as the government tries to cut back on its expenses and funding for healthcare.

Over the long-term, I still see a positive future for Capitol, but I’m still concerned about its huge debt pile. For that reason alone, I won’t be topping up my holdings just yet.

Integral Diagnostics Ltd (ASX: IDX)

Suffering from the same investor disillusionment as Capitol Health, Integral also offers diagnostic imaging services such as X-ray, MRI, nuclear medicine and ultrasound. But despite the market’s hate for the company, Integral did deliver impressive returns in the 2016 financial year (FY16) compared to Capitol.

Pro forma net profit was up 5% to $16.6 million – representing earnings per share of around 11.4 cents and a P/E ratio of 13.8x. A payout ratio of ~70% represents a dividend yield of circa 5% too. That suggests Integral is a better play on the diagnostic imaging theme than Capitol Health.

Lifehealthcare Group Ltd (ASX: LHC)

A distributor of medical appliances, devices, parts and accessories used by medical practitioners, Lifehealthcare has also suffered from threatened cuts to government funding. Despite the concerns, Lifehealthcare has a strong track record of growing revenues and earnings (over 10% compound annual growth rate for revenues). The company also has a top 3 position in its core therapeutic channels.

At the current price of $1.87, shares are trading on a trailing P/E of 10.2x and paying a fully franked 6.7% dividend yield. I believe the market has overreacted, and the current price could be an opportunity.

Paragon Care Ltd. (ASX: PGC)

Paragon is a competitor to Lifehealthcare, although the companies do source and distribute different types of medical products. That means plenty of room for both to be successful. The problem with Paragon is the price. At the current share price of 83 cents, Paragon is trading on a P/E ratio of 18.3x and paying a lowly dividend yield of 2.7%. At face value, Lifehealthcare looks to be the cheaper, higher income play.

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Motley Fool writer/analyst Mike King owns shares in Capitol Health and Lifehealthcare. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. 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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