4 things to look for when buying ASX healthcare shares

Fidelity's Zara Lyons tells us what to look for when researching and selecting ASX healthcare stocks for investment.

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Key points

  • Fidelity's Zara Lyons discusses why she's positive on ASX healthcare shares in FY24
  • Lyons says there are 4 key things to look for in healthcare businesses
  • She also shares which healthcare shares she likes most, including a few ASX 200 giants and a promising small-cap share

ASX healthcare shares are currently underperforming ASX 200 shares, but over the longer term, they've grown twice as fast.

The S&P/ASX 200 Index (ASX: XJO) is up 7.1% over the past year, while the S&P/ASX 200 Health Care Index (ASX: XHJ) is down 4.8%.

But over the past five years, healthcare shares have risen 25.6% while the benchmark has gone up 12.8%.

In the Australian Financial Review (AFR), Fidelity's Zara Lyons outlines why she's positive on ASX healthcare shares today and the four key elements to look for when selecting companies to invest in.

What makes a good healthcare stock?

Lyons says there are four things she looks for in ASX healthcare shares.

They are businesses that:

  1. Have strong competitive positions and wide moats
  2. Are competing in concentrated markets with high barriers to entry and attractive growth prospects
  3. Can generate high incremental returns on invested capital
  4. Look sustainable on a three-to-five-year horizon.

She explains:

Barriers to entry can include scale, technology, intellectual property, patents, regulation, and research and development capability. These companies tend to exercise some price power in the value chain.

Fortunately, over the years, the ASX has had a diverse range of listed innovative healthcare companies, that have pioneered leading technology.

These include the cochlear implant, obstructive sleep apnoea devices, Selective Internal Radiation (SIR-Spheres), HPV vaccine and IVF to name just a few.

Which ASX healthcare shares does this expert like most?

Lyons is an analyst and portfolio manager of Fidelity's Australian equities fund.

Among the fund's top holdings are CSL Limited (ASX: CSL) shares and Ramsay Health Care Ltd (ASX: RHC) shares.

She likes CSL shares because the company offers a large diversity of products and a strong pipeline.

Lyons says she also likes private health insurers Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF). However, she says: "… we don't own either business in the portfolio, currently primarily on valuation grounds".

She adds: "We see value in Suncorp Group Limited (ASX: SUN), which is our key exposure to the insurance sector."

Lyons also sees attractive growth prospects for biotech small-cap Immutep Ltd (ASX: IMM).

Immutep's immunotherapies are designed to boost patients' immune systems to fight cancer and autoimmune diseases.

She says:

Immutep has a number of shots at goal, with four assets currently under development. Two of those assets have been licensed to Novartis and GSK.

The company recently completed a capital raising and is well-placed for future growth.

Motley Fool contributor Bronwyn Allen has positions in CSL. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended GSK. The Motley Fool Australia has recommended NIB Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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