Global equity markets are cautiously bullish and relying on interest rate cuts to fuel growth. It’s time to re-assess a few ASX 200 healthcare stocks and if it presents favourable fundamentals and valuations for a place in a balanced or growth-focused portfolio.
CSL Limited (ASX: CSL)
CSL is a market darling that has performed consistently for more than two decades (if we ignore the GFC). CSL is a global biotechnology company that develops and delivers innovative medicines across more than 60 countries. While CSL is renowned for its ability to consistently deliver low to mid-teens growth, year-on-year, the company does trade at a price-to-earnings (P/E) ratio of roughly 36.
CSL is arguably an expensive stock, but has the potential to go higher. However, I believe the risk/reward at its current levels are sub-optimal. Especially with earnings season around the corner, it is highly likely that CSL delivers on its low to mid-teens growth, the share price falls (like it did last earnings season in February) before making a strong recovery.
Cochlear Limited (ASX: COH)
Cochlear is a market leader in the manufacturing and distribution of cochlear implantable devices for hearing impaired. The Cochlear share price is sitting near all-time highs, around the $220 range. The company possesses a similar fundamental and valuation story as CSL. Cochlear currently trades at a P/E ratio of approximately 47 and delivers growth figures within the low–mid teens.
I have a similar feeling that the risk/reward of buying a slow growing company at a premium valuation near its 52-week high is a poor choice. Investors should wait until after earnings season before making an investment decision in either of these stocks.
Nanosonics Ltd. (ASX: NAN)
Nanosonics manufactures and distributes its breakthrough disinfection product used for ultrasound probe reprocessing. While the Nanosonics share price is up more than 100% in this year alone, I am confident that there is plenty of fuel left in the tank.
With that being said, the company is incredibly expensive, trading at a P/E ratio of around 110. However, there are plenty of factors in play that give Nanosonics the potential to be the next Cochlear of its kind. The company is currently the standard of care in Australia, with approximately 70% market penetration and 43% market penetration in North America. However, in the context of the global opportunity, the company’s HY19 report cited only 16% market penetration.
Nanosonics is currently expanding into various markets such as Mexico, China and Japan. A preliminary clinical study in Japan found that over 90% of probes (in Japan) were contaminated. With regulatory approval in place and a pre-marketing strategy underway, this could be the market the sets Nanosonics’ growth apart from the rest.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia has recommended Cochlear Ltd. 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.