A healthcare focussed portfolio appears to be one of the most attractive ways to identify and hold companies with strong current earnings and the ability to grow profits over decades, rather than years.
However, if you wanted to build a portfolio of stocks in the healthcare sector which stocks would fit the bill? To approach this question, I have selected four companies, with large stable businesses on one end of the scale and smaller more growth-focussed options at the other.
The large caps
Cochlear Limited (ASX: COH) is an Australian success story with global earnings power. The company is one of a small number of firms with a meaningful share of the implantable hearing device market.
The company recently announced a surprise profit upgrade, with the factors underpinning that upgrade set to continue. Increased healthcare spending by emerging market customers, coupled with brand loyalty from developed markets should see Cochlear prosper for years to come.
CSL Limited (ASX: CSL) is another home grown success story, with CSL originally an acronym for the government-owned Commonwealth Serum Laboratories.
CSL is a global producer of blood products for use in hospitals, as well as vaccines. For patients suffering from haemophilia or liver deficiencies, CSL products are indispensible. If it can build its flu vaccine business into a global player by using the high value medical manufacturing knowledge it has amassed, it could have two huge profit engines driving profit growth for years.
The small caps
Lifehealthcare Group Ltd (ASX: LHC) is a small cap stock that is relatively new to the ASX. The company is a speciality importer of high value implantable medical devices used in complex surgeries, as well as medical hardware like portable ultrasound machines.
The falling Australian dollar, a Federal government review into medical device reimbursements and higher-than-expected interest costs on debt used to fuel acquisitions smashed the share price recently. However, the business has a level of sticky revenue as surgeons who use Lifehealthcare products are relatively loyal as they grow comfortable with the products. Average revenue per surgeon is $447,000, and the company has consistently grown the number of active surgeons by 5% or more a year.
CogState Limited (ASX: CGS) is best defined as a micro cap, and should only be considered by investors with a high risk tolerance. However, the company has the potential to be much much larger based on its impressive results to date.
The company counts over 60% of the largest multi-billion dollar pharmaceutical companies as clients. CogState is in the business of providing scientifically verified cognitive ability testing and measurement services. These tests can be used to test the efficacy of a new drug during trial phases, or to pre-qualify patients for trials. Both processes save pharmaceutical companies substantial costs, meaning CogState has a strong basis for recurring revenue and upselling its services.
Foolish takeaway
Healthcare companies have many of the qualities that make for great long-term investments, and building a portfolio around strong healthcare stocks with competitive advantages or options to grow substantially in the coming years can be a winning strategy.
