The health sector on the ASX hasn't been, well, all that healthy over the past few years.
According to a new report from the team at Wilsons Advisory, the locally listed health stocks have underperformed the broader market for the past five years.
But they reckon it's time to take another look, with plenty of well-established, high-quality companies to choose from.
They outline their broad thesis as such:
Given our quality/growth bias, we are naturally drawn to healthcare, as the sector is home to a number of highly profitable, global market leaders benefiting from enduring structural tailwinds – including ageing populations, rising chronic disease prevalence, and ongoing innovation and product advancement. Collectively, these factors have historically supported strong earnings growth and attractive returns on invested capital across market cycles.
And right now, the Wilsons team says the sector appears to be ripe for a rerating for three reasons, which are: highly compelling relative valuations; above market earnings growth, and; bottom-up drivers, by which they mean stocks with a compelling story to tell.
So which stocks do they like, and why?
ResMed Inc (ASX: RMD)
ResMed, which sells sleep apnoea devices and software, is Wilsons' "highest conviction" pick, underpinned by three factors.
The Wilsons team says the growth fundamentals in the CPAP sleep apnoea device market are strong, with "structural tailwinds supporting patient flow", and forecasts of compound annual growth rates of 8% over three years are, if anything, conservative.
ResMed also recently updated its gross margin guidance to 61% to 63%, ahead of consensus estimates, while the company still offers attractive value at the current share price, Wilsons says.
Telix Pharmaceuticals Ltd (ASX: TLX)
Telix stock has taken a bit of a drubbing this year, "driven by a series of negative surprises", the Wilsons team says.
But they say that the company's recent third-quarter update was "encouraging", with FY25 revenue guidance upgraded to US$800 to $ US$820 million, suggesting strong momentum from the launch of its Gozelliz compound.
They added:
The Gozellix approval and positive third quarter update are the first steps in Telix's turnaround story. There are several other material upcoming catalysts that are likely to drive the stock over the near-term.
CSL Ltd (ASX: CSL)
The Wilsons team note that CSL "disappointed the market" in the most recent reporting season, with modest earnings per share downgrades, "driven by further delays to its gross margin recovery despite its productivity initiatives''.
While the Wilsons team said the company's missing expectations in consecutive earnings periods had eroded their confidence in its medium-term outlook, the valuation at current share price levels was attractive.
Cochlear Ltd (ASX: COH)
The hearing implant maker will benefit from a new product rollout, driving market share gains, the Wilsons team says, "driving an upward inflection in earnings over the medium-term, while recurring firmware enhancements will allow for an extended product cycle and longer growth runway''.
On the valuation front:
Cochlear's traditionally 'expensive' valuation multiple has historically been a barrier to inclusion in the Focus Portfolio, given our bias towards growth at a reasonable price. However, on 40x forward earnings, the stock now trades at a meaningful discount to its five-year average multiple of 51x.
The Wilsons team said they were cautious about Cochlear shares in the short term, "Nonetheless, for investors willing to look through near-term share price volatility and take a medium-term view, Cochlear appears to offer a reasonable entry point considering its medium-term growth trajectory''.
