For many investors, the health care sector is one of the best places to invest for the long term. That's at least partly because, historically, it has offered stunning returns and the opportunity to outperform the wider index.
Furthermore, the health care sector's financial performance is far less correlated with the wider economic outlook than most sectors and, as a result, the share prices of health care companies tend to help a portfolio to smooth out the peaks and troughs of the ASX's performance. In addition, health care stocks tend to have relatively low betas and this means that their volatility is also lower than the wider index, too.
Of course, health care stocks are understandably popular at the present time. The ASX has fallen by 9% in the last six months and, looking ahead, there could be more pain in the short run. That's especially the case since the Chinese economy is continuing to endure a soft landing and the falling price of commodities is having a knock-on effect on the Aussie economy.
As such, the share prices of health care stocks such as pharmaceutical company, CSL Limited (ASX: CSL), and private hospital operator, Ramsay Health Care Limited (ASX: RHC), have soared by 32% and 30% respectively in the last year. Looking ahead, they both have the scope to become even more popular among investors owing to them having betas of just 0.6 (CSL) and 0.5 (Ramsay). This means that for every 1% move in the value of the ASX, CSL and Ramsay's share prices should change by 0.6% and 0.5% respectively, thereby making them excellent defensive plays during a downturn.
In addition, growth prospects for the two companies are also strong, with CSL due to post a rise in earnings of 12.4% in each of the next two years and Ramsay being expected to increase its bottom line by 19.6% per annum during the same time period. Their low correlation with the wider Aussie economy is clearly a major pull for investors and, with the majority of CSL's earnings being derived from outside of the domestic economy and Ramsay also having operations in Europe and in Asia, they could both gain a real boost from the weakening Aussie dollar over the medium term.
Clearly, neither stock is dirt cheap, but their price to earnings growth (PEG) ratios indicate good value based on their prospects, stability and track records of growth. As a result, PEG ratios of 1.95 (CSL) and 1.58 (Ramsay) may be higher than the ASX's PEG ratio of 1.38 but the two health care stocks have managed to increase earnings at an annualised rate of 22% (CSL) and 21% (Ramsay) during the last 10 years, thereby making them much more reliable than the vast majority of ASX-listed companies.
So, while the ASX's performance over the medium term may be somewhat disappointing even if the RBA decides to cut interest rates further, CSL and Ramsay are likely to outperform it. As such, now seems to be an ideal time to buy a slice of both of them.
