The Australian share market has reached all-time highs, but according to one expert, there is still one sector that's selling at a 30% discount.
There is constant commentary about the ageing population and the need for investment catering to older Australians.
So Citi senior investment specialist Mahjabeen Zaman is puzzled by how health shares have struggled recently.
"Australian healthcare stocks, which include some leading global companies, have underperformed our primary share market index, the S&P/ASX 200 Index (ASX: XJO), by 30% over the past 12 months," he said on a Citi blog post.
"It is not a phenomenon restricted to Australia. In the United States, Bloomberg data shows the price of healthcare stocks, based on forward earnings estimates, trade at a 30% discount to the S&P 500 Index (SP: .INX)."
Zaman added that this situation provides investors with a golden opportunity to buy in for cheap.
"Healthcare will be a global focus for a long time to come… Life expectancy globally increased from 52 years in 1960 to nearly 73 years in 2019," he said.
"Citi views increasing longevity as one of our unstoppable trends, which are long-term forces that revolutionise the way we live and do business globally."
Zaman's team reckons growth in healthcare revenues and profits will outpace other sectors just because of the ageing global demographics.
"Also, the potential 'value' of healthcare shares stands out, as most other sectors are trading at high valuations," he said.
"Historically, healthcare has shown resilience on the downside when broader markets correct."
3 leading ASX healthcare shares
Zaman especially likes 3 ASX stocks in particular — CSL Limited (ASX: CSL), Resmed CDI (ASX: RMD) and Sonic Healthcare Limited (ASX: SHL).
"A shared trait is they derive the majority of revenue from US sales, placing the companies in a prime position to do well as the US recovers from the pandemic."
Resmed's ungeared balance sheet and strong cash flow is attractive to Citi.
"We expect continued share buybacks likely in the absence of meaningful acquisition opportunities."
The prospect of plasma donors in American returning in the post-COVID era gives CSL tremendous comeback potential.
"Plasma fractionation accounts for about 85% of CSL's earnings," said Zaman.
"We expect that as the year progresses plasma donors will return in the US, and that plasma collections will increase towards normal, leading to earnings upgrades next year."
Sonic Healthcare is the third largest pathology services provider in the world, according to Zaman.
"Sonic owns the biggest privately held pathology lab in the US, Clinical Pathology Laboratories, as well as one of Europe's largest, Bioscientia Healthcare," he said.
"Management has made it clear the company's balance sheet is under geared, and have a pipeline of merger and acquisition opportunities. It is actively bidding on a number of opportunities [for] mergers and acquisitions, contracts and joint ventures in Australia, UK, USA and Canada."
Sonic's shares were up 1% on Tuesday morning, trading at $37.92. They're up 15% this year.
CSL stocks plunged 1.64% in early trade on Tuesday, to go for $299.98. That's 5% up year-to-date.
Shares for Resmed rose 1.27% on Tuesday morning, selling for $31.86. They've ascended 16% this year so far.
