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Broker’s simple tip on picking healthcare winners in 2018

Large cap healthcare stocks were among the winners from the February reporting season and comments from management point to a generally upbeat outlook for the sector even though there were some notable disappointments.

The question now is how do you pick the ones to back in 2018 given that you have to either cough up and pay a premium for stocks that have delivered a strong result or run the risk of a nasty earnings surprise by picking from the bargain bin.

Here’s an easy-to-follow tip from Morgan Stanley: buy healthcare stocks with large US dollar exposure and shun those with Australian dollar earnings.

It’s not so much about the price-earnings premiums or beating consensus expectations. While those are important, the exchange rate could be the more important differentiating factor among our largest listed healthcare companies.

It will be “hard for investors to go overtly wrong” by picking the US-dollar earners, according to Morgan Stanley, who noted that the outperformance for this group of stocks appear hard to derail given their strong earnings per share (EPS) and price momentum.

While the tailwind from a falling Australian dollar hasn’t quite materialised just yet, there are signs that the stubbornly resilient Aussie is starting to buckle with the currency falling under US78 cents recently.

But there’s no guarantee that the Aussie will stay on the downtrend. After all, even Morgan Stanley has conceded that the downbeat predictions for the Aussie battler had been off the mark for the past three years.

Nonetheless, this has only strengthened the broker’s preference for stocks with US dollar-denominated earnings and this includes sleep disorder treatment company ResMed Inc. (CHESS) (ASX: RMD), blood products group CSL Limited (ASX: CSL) and hearing device maker Cochlear Limited (ASX: COH).

These stocks are trading on high price-earnings (P/E) multiples due to their robust profit growth profile, but there are two healthcare stocks in the “value” category that sits at the top of Morgan Stanley’s buy list.

The two stocks are diagnostic facilities operator Sonic Healthcare Limited (ASX: SHL) and rubber products maker Ansell Limited (ASX: ANN).

On the flipside, the broker is urging investors to avoid non-US dollar exposed healthcare stocks. These include medical facilities operators Ramsay Health Care Limited (ASX: RHC), Healthscope Ltd (ASX: HSO) and Primary Health Care Limited (ASX: PRY).

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ansell Ltd., Cochlear Ltd., Ramsay Health Care Limited, and ResMed Inc. 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 Scott Phillips.

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