With the Aussie economy having an uncertain future and the ASX declining by 8% in the last three months, many investors may be seeking out relatively defensive stocks to ride out the present problems. In fact, with China also experiencing a difficult week last week, the emphasis on capital preservation seems to have increased and, with health care stocks tending to have lower correlations with the macroeconomic outlook than many of their index peers, they seem to be a logical place to invest right now.
Of course, Ramsay Health Care Limited (ASX: RHC) is among the most stable, reliable and consistent stocks on the ASX, with its bottom line having increased at an annualised rate of 20.9% during the last ten years. A key reason for this is the type of service that it offers, with Ramsay being the biggest private hospital operator in Australia. As such, demand for its services is usually relatively stable – especially compared to other health care plays such as pharmaceuticals, which are subject to the boom and bust cycle of losing patents and developing new drugs.
In fact, Ramsay is a more reliable opportunity than its health care peer, Cochlear Limited (ASX: COH). That's because Cochlear is much more dependent upon new product launches and the impact of competition, which is evidenced by the fact that its earnings have risen by just 4.8% per annum during the last ten years. Furthermore, Cochlear's bottom line has actually fallen over the last five years, by 6.8% per annum, which shows that it may be a less reliable stock to hold moving forward.
Despite this, Cochlear does offer excellent growth prospects, with a number of new products set to boost the company's earnings by 38.9% per annum during the next two years. And, despite this excellent growth potential, Cochlear trades on a price to earnings (P/E) ratio of 28.3 which, when combined with its growth outlook, equates to a price to earnings growth (PEG) ratio of just 0.73. This is less than Ramsay's PEG ratio of 1.53 and indicates that Cochlear's shares could have more scope to rise than those of its health care peer.
However, where Ramsay has added appeal is with regard to its stability. Certainly, pricing pressures in France and doubts surrounding the Chinese economy (where Ramsay recently entered into a joint venture) may act as a brake on its share price performance. However, with fear among Aussie investors likely to rise over the medium term, defensive stocks offering growth at a reasonable price, such as Ramsay, could see their share prices bid up.
So, although Cochlear has a 2.9% yield versus Ramsay's 1.5% yield, better growth prospects and a wider margin of safety via its lower PEG ratio, Ramsay offers more certainty, which is a rare commodity in today's fearful environment. This appears to make it the better buy at the present time.
