There are only seven stocks in the Healthcare (Health) sector of the ASX 100 – which are listed in the Table – and there are another four in the next 100. Despite being in the same sector, these seven companies are largely quite different in their products/services and markets.

CSL, the plasma company, is by far the biggest – being more than 50% of this sector’s top 200 market capitalisation. Resmed has products for sleep disorder; Sonic runs pathology services in Australia and overseas; Ramsay owns hospitals etc; Cochlear is a world famous ear implant producer; Ansell produces health protection products; and Primary runs medical practices and provides pathology and imaging services.

The Health sector may benefit going forward from an ageing population. It is certainly considered by most to be a defensive sector, as evidenced by the performance of many of these stocks through the GFC. However, the dividends are not high by ASX 200 standards and often are not fully franked because of overseas exposure. They also typically trade on high P/E ratios compared to those of the broader index.

Only three stocks meet my ‘2.5’ broker recommendation status (‘1’ being the highest rating, ‘5’ the lowest – please see my paper on the Market Updates tab of our website www.woodhall.com.au for details). They are CSL, Resmed and Primary – and two of them only just!

CSL, seemingly a very well-run company, has run very hard in price over the last year (+86.9%) and I find it hard not to think CSL has overly benefitted from the flight from cash and bonds into equities. On a personal note, I held CSL throughout the GFC and made a nice profit from it – but it seems I sold (last year) too soon. I sold because I had the sector overpriced by more than 8%. I also sold Sonic at the same time and for the same reason – and that seems to have been a wiser call on my part.

Having been a short-term user of a Resmed product, I cannot understand the business. For someone with bad sleeping patterns, I could not cope with what felt like a diving mask and tube to an aqualung attached to me in bed. The business and stock price have clearly done well (the price perhaps too well at 55.1% for the last 12 months) but I am content not to have invested in it. Primary too has run very hard at 48.7% for the last 12 months.

Turning to Chart 1, I plot the recommendations for all of the seven companies and show how these have moved over time.  Resmed’s trace over time in Chart 1 is the best (with a current recommendation of 2.0) and it has been improving for most of the year. Ramsay and Cochlear have the worst ratings of this group of seven – and the others are clustered together.

I have owned Cochlear for many years and feel that the brokers could have this one wrong. Its price was about $80 when it chose to recall one of its products last year and the stock price suddenly fell to nearly $50. Since that time, its price returned to over $80 and it did so at very much the same rate as the sector’s index. I wonder if it had not needed to recall one of its products, which seems to have been handled very well, would its price have risen from the same rate over the same time but from a base of $80 (to well over $100!).  Cochlear reported this week and just missed estimates. As a result, the stock price got hammered. Since the future looks good – with strong growth in Asia – and a bad year behind it because of the cost of the recall, I have a personal buy on this stock in conflict with the brokers – just when I bought more at about $55 just after the recall last year.

From experience, I use +6% overpricing (or exuberance as I prefer to call it) as a trigger for a price correction of about 6% – 10% – or a prolonged sideways movement in price. I have been monitoring these statistics and related methods for more than eight years and I think they have served me very well.

From Chart 2, I note that the Health sector behaved as I might have expected until mid 2012 but crossed the ‘magic’ dotted line of 6% and has largely stayed there. While I do not necessarily expect a large price correction in this sector, I do expect the race has been largely run and a move into resources from defensive sectors will be the theme of 2013. I am still overweight this sector but I was very much so during the bad times.

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