Healthcare is regarded as a defensive industry, given demand for its services are relatively inelastic. This is because people will continue to use health services irrespective of the economic cycle. Accordingly, the S&P/ASX 200 Health Care Index (ASX: XHJ) has benefited dramatically with the index up over 10% since the start of this year. These returns easily trump the S&P/ASX 200 Index (ASX: XJO), which is only up 2.5% since the start of the year.
A contributor to the success of the Health Care Index has been the stellar rise of its two biggest exponents; Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), both of which are up 25% and 10% respectively since the start of the year.
However, given their current prices, it's time to consider whether there is much value left in these healthcare blue chips.
Cochlear Limited
Cochlear is the gold standard in cochlear implants. The company pioneered bionic hearing devices in the early 1980's under the guidance of Dr Graeme Clark and has gone from strength-to-strength as one of Australia's most innovative biotechnology companies.
Cochlear's legacy has stood the test of time despite a number of product recalls in 2013, fears of cheaper hearing implants from China and intense competition from number two implant brand Advanced Bionics (owned by Swiss medical product giant Sonova).
It is currently the brand of choice for hearing aids and accounts for approximately two-thirds of all hearing implants installed in patients worldwide.
Relevantly, sales benefit from this demand. The company reported a 32% increase to headline sales revenue in the first-half of 2016. The uplift in sales was driven by foreign exchange gains, given the stronger U.S. dollar. As current forecasts indicate a continuing depreciation of the Australian dollar, Cochlear should stand to benefit from this trend.
CSL Limited
CSL is a global leader in blood plasma, immunoglobulin and vaccine products, effectively having a duopoly over most of its offerings with American healthcare giant, Baxter International Inc. To CSL's credit, however, it has not rested on its laurels. CSL has been active in acquisitions, such as last year's purchase of Novartis AG's influenza vaccine business to strengthen its stranglehold over the flu vaccine market.
Although I have always regarded CSL as "expensive", the company continues to surprise. In its first half of 2016, earnings per share grew 9% and underlying net profit after tax (NPAT) came in 7% higher compared to the prior corresponding period.
I believe this growth is likely to continue, especially given favourable tailwinds from a stronger U.S. dollar (as results will be higher when translated to Australian dollars).
Foolish takeaway
Australian investors are fortunate with the array of stocks exposed to healthcare available to them on the ASX. Whilst any diversified portfolio should consist of stocks from all sectors, investors may wish to wait for a better entry point before purchasing Cochlear and CSL, given their premium valuations.
Whilst I wouldn't be surprised to see both stocks head higher this year, I believe investors should wait for a pullback in share price before adding these two solid stocks to their portfolio.
