In these times of market turbulence it could be worth thinking about adding some healthcare stocks to your portfolio. The S&P/ASX 200 Health Care Index has easily outperformed the broader ASX200 over the last 10 years, and these investments have the added benefit of lending your portfolio some defensive characteristics during market downturns. People’s basic need for healthcare tends to be generally ignorant of tumult in the wider economy, which is what makes healthcare stocks such great buy and hold investments when global markets become volatile. But that doesn’t mean every healthcare stock will deliver you superior returns. So…
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In these times of market turbulence it could be worth thinking about adding some healthcare stocks to your portfolio. The S&P/ASX 200 Health Care Index has easily outperformed the broader ASX200 over the last 10 years, and these investments have the added benefit of lending your portfolio some defensive characteristics during market downturns.
People’s basic need for healthcare tends to be generally ignorant of tumult in the wider economy, which is what makes healthcare stocks such great buy and hold investments when global markets become volatile.
But that doesn’t mean every healthcare stock will deliver you superior returns. So which one should you consider adding to your portfolio?
CSL Limited (ASX: CSL) is a global biotechnology company headquartered in Melbourne. It researches and develops vaccines – including the flu vaccine – but it also has a focus on treating rare and serious diseases.
The biotech industry requires extensive and specialised knowledge as well as serious financial investment. Over the last 5 years CSL has invested a whopping US$2.6 billion into R&D. This gives you a sense of how prohibitive the barriers to entry are for new start-ups in this sector. But it also shows how much CSL needs to invest to maintain its market leading position.
Thankfully it doesn’t seem to be seeing any diminishing returns from that massive investment in R&D – financially, 2017 was a banner year for the biotech giant. CSL brought in US$6.9 billion in total revenues in FY17, an increase of a little over 13% on the prior year. Net profit was also up almost 8% to US$1.3 billion.
Investors liked the result, and CSL’s share price has risen about 11% since it released its full year results to the market back in mid-August. Despite hitting a high of $150 in late January, shares in CSL have really been more or less trading sideways since November, perhaps indicating that the market thinks a price of around $140 and a multiple of 37x earnings is about fair value.
CSL will announce its first half 2018 result on 14 February.
Healthscope Ltd (ASX: HSO)
Healthscope is the second-largest private hospital operator in Australia after Ramsay Healthcare Limited (ASX: RHC). Healthscope currently manages 45 hospitals in Australia, and is a leading provider of pathology services in New Zealand, Malaysia and Singapore.
Healthscope was acquired by a consortium of private equity funds in October 2010 and was delisted from the ASX. Since relisting in July 2014, the company’s share price has been pretty volatile – with periods of decent growth too often interrupted by sharp and ugly declines.
Take late August 2017 as an example, when the share price shed over a quarter of its value in just a few short weeks after it announced in its annual report that statutory NPAT had declined 38.8% on the prior year. Or October 2016, when the share price declined 30% in a similarly short period after an earnings downgrade.
Based on its past performance, Healthscope doesn’t fill me with a great deal of confidence. Its current price of $1.89 represents a multiple of 31x earnings, and given its track record that seems expensive to me.
Healthscope will announce its half yearly results on February 15th.
Sonic Healthcare Limited (ASX: SHL)
Another healthcare company that will announce its half yearly financial results on Feb 15 is Sydney-based Sonic Healthcare. It is a global medical diagnostics company that operates in a number of key healthcare segments including pathology, laboratory medicine, radiology, imaging and clinical services. It has a presence in Australia, New Zealand, Europe and the USA.
Sonic’s 2017 results were strong without being exceptional. Although statutory net profit declined by 5%, it was actually up 4% to $459 million on an underlying constant currency basis, after the company adjusted for foreign currency headwinds and significant one-offs.
The company’s FY18 guidance is for an EBITDA increase of 6%-8%, however it does anticipate a rise of 10%-15% in its interest expense, which could dampen its final net profit.
Investors in Sonic have had a pretty good run over the last few months – the share price has gained about 20% since October and is now threatening to break through $25 for the first time in its history.
At a multiple of 24x earnings and a 20% franked dividend yield of 3.12%, Sonic feels to me like the best buy out of these three healthcare stocks right now. But cautious investors may want to hold off until its results are released to the market on Thursday.
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Motley Fool contributor Rhys Brock owns shares of Ramsay Health Care Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. 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.