Investors everywhere who have remained steadfast in the face of market turmoil have been subjected to the wildest of wild rides, with new multi-year highs bouncing down to multi-year lows. The following year over year chart compares the performance of the ASX All Ordinaries against the US Dow Jones Industrial Average (DJIA).

The final week of August 2015 trading has been breathtaking, with the DJIA dropping 1,000 points only to begin recovering before dropping again.  Of the varying opinions for what happened we favor those that begin and end with the Chinese Stock Market and its economy.

The preliminary figure for the August Chinese purchasing managers’ index (PMI) collapsed to 47.1, close to the lowest number in six and a half years.  Coupling that with the falling Chinese stock market and the government’s attempts to prop up the market but not the economy, and the rout began.  Finally the Chinese government intervened with policy measures to increase liquidity in their economy.  Stock markets began to recover slowly.  Many analysts tell us to expect more volatility in the remaining months of the trading year.

Investors with nerves of steel and the belief rough times open buying opportunities should be looking for defensive stocks to weather the storm, should it continue or worsen.  The hottest sector on the ASX remains and has been for some time Healthcare.

What’s more, some of our biggest and best Healthcare stocks are global in scope, benefiting from the fall of the Australian dollar.  With the recent drop below 72 cents against the US dollar, it appears that the target of 70 cents from some analysts may well be in the offing.  Deutsche Bank is predicting a fall to 60 cents.  Here is a year over year chart for the AUD vs the USD.

This suggests improved profitability in three ASX Healthcare Stocks deriving a majority of their revenues from the US market, CSL Limited (CSL), ResMed INC. (RMD), and Cochlear Limited (COH).  However, the AUD has also fallen against both the Euro and the British Pound Sterling (GBP) as shown in the following two charts.

This bodes well for another top ASX Healthcare stock, Ramsay Healthcare (RHC), the private hospital operator with a presence in France and the UK.  However, recent panic in global share markets suggest “China-watching” trumps currency fluctuations.  The hard truth is no one knows how much the Chinese economy will slow down, although very few still believe it is not cooling off.  This suggests the most rational play right now would be to look for the most defensive stocks within the Healthcare Sector.

This rules out the notoriously volatile biotech stocks engaged in new treatment discoveries, leaving us with stocks with established track records providing proven products.  Even here, not all “products” are equally defensive.

To illustrate, imagine a physician recommending an immediate admission to a hospital; or a physician recommending a blood plasma treatment for a patient in a hospital.  In both cases, how likely is the patient to forego the admission or the treatment over concerns the Chinese GDP may fall below 5%, or 4%?

We think this puts CSL Limited and Ramsay Healthcare to the forefront as the most defensive healthcare stocks money can buy.  They offer potentially life-saving products.  On the other hand, sleep disorder equipment provider ResMed Inc. and hearing implant provider Cochlear Limited offer life-improving products.  In addition, insurance coverage for Cochlear implants and ResMed devices varies and patients with high deductibles could very well forgo treatment if their situation puts them at excessive risk to global economic growth slowdowns.  

This is not to say Cochlear and ResMed are not solid stocks worthy of buying on dips; only that CSL and Ramsay appear to be the better plays given the uncertainty over a global slowdown driven by a “hard landing” in China.  The following table includes historical performance of total shareholder return as well as historical earnings growth and a two year earnings forecast.

Company

(Code)

Closing Share Price

27 August

Closing Share Price

24 August

5 Year Earnings Growth

10 Year Earnings Growth

5 Year Total Shareholder Return

10 Year Total Shareholder Return

2 Year Earnings Growth Forecast

CSL Ltd

(CSL)

$91.85

$87.43

+15%

+22%

+25.5%

+25.5%

+12.4%

Ramsay Healthcare

(RHC)

$63.68

$58.14

+16.9%

+16.9%

+36.9%

+24.6%

+21.3%

Cochlear Ltd

(COH)

$84.79

$83.48

-1.5%

+6.4%

+7.8%

+10.6%

+16%

ResMed Inc.

(RMD)

$7.29

$7.15

+16.9%

+17.5%

+17.8%

+12.4%

+7.4%

Investors with courage and conviction who bought any of these stocks on what is now being called “Black Monday” have already been rewarded.  RHC rose close to 9%, driven by yet another stellar Full Year Earnings Report with a 49.9% revenue increase and a 27% rise in profit.  The company is now the market leading private hospital operator in both Australia and France.  

Analysts have cautioned for some time that RHC is a growth stock trading at levels requiring near perfect execution to sustain the share price.  To date, Ramsay has delivered.  The following chart shows Ramsay’s stock price appreciation since it began trading on the ASX in 1997.

Note that Ramsay’s two year earnings growth forecast is substantial at 21.3%.  The company’s strategy includes organic growth through favorable demographic trends and continuous improvement of existing facilities; capacity expansion through development of “brownfield” sites; public/private hospital collaborations; and acquisitions.  Ramsay already has a presence in Malaysia and Indonesia and on 21 May announced a joint venture to expand into China.  

By market cap CSL is the largest health care stock on the ASX and shares an important defensive characteristic with Ramsay Health Care – both are low Beta stocks.  Beta is a measure of volatility that demonstrates movement of an individual stock in comparison to the market as a whole.  A Beta of 1.0 indicates the stock price is most likely to move with the market.  In downturns this means the stock could move down in sync with the market regardless of fundamentals.  Beta values under 1 are considered less volatile.  Ramsay has a Beta value of 0.48 while CSL’s beta is 0.60.

CSL began trading on the ASX in 1994 and while its share price history shows a bit more volatility than Ramsay’s it is still impressive.  The share price recovered 4.8% in the immediate aftermath of Black Monday.  At the beginning of August CSL became the first ASX stock to break the $100 per share barrier in recent years.  Here is the chart for CSL since its inception on the ASX.

CSL actually topped $100 back in 2007 and then executed a 3 for 1 share split, leading some to speculate whether or not the company plans to do so again.  On 12 August the company announced a Full Year 2015 profit increase of 5%, but it fell short of the company’s own guidance, disappointing investors.  

CSL is the only stock in the table with an analyst consensus rating of Outperform, with 4 at Buy, 7 at Outperform, 3 at Hold, 2 at Underperform, and no analysts recommending investors Sell the stock.  The company operates around the world with an impressive array of medical treatments, both in quantity and quality.  

CSL has 20 plasma-derived therapies on the Australian market, with 12 sporting a registered trademark; 17 in the US, all of them trademarked; 7 in Germany; with selected availability as well in Japan, Malaysia, in Brazil, Europe, the United Kingdom, China, Mexico, Hong Kong, and India.

CSL has 18 different trademarked vaccine offerings in Australia; 17 in the US, with additional market penetration in the above listed countries.  

CSL also produces and distributes antivenoms and a broad range of pharmaceuticals around the world, as well as immunohematology (blood banking) treatments.  

CSL recently acquired the vaccine business from Swiss Pharma giant Novartis.  In FY 2014 the company invested US$466 million into research and development and has multiple new offerings in its product pipeline.  Given the tailwinds from an aging population around the world, CSL seems a Buy, dip or not.

Cochlear has recovered admirably from the shock of a product recall a few years back but the company is facing increasing competition in its prime US market.  The recent Full Year 2015 Earnings Release was impressive, with a 15% increase in revenue and a 56% rise in net profit; but profit fell short of guidance and the FY 2016 revenue outlook disappointed investors. The share price dropped from a pre-report closing price of $88.55 to $82.18 closing on the day of the release.  However, the company does get close to 45% of its revenue from the US and the outgoing CEO stated the company’s latest addition, the Nucleus 6, would begin to drive sales in 2016.  Analysts appear to be unconvinced as the pre-release consensus rating was Hold, with no analysts recommending investors Buy the stock and 2 recommending investors Sell.

If you look at the 10 year+ price movement charts for CSL and RHC you will not see much downward movement as a result of the GFC.  While this is far from hard evidence, it does seem to support our earlier contention that consumers are less likely to forego life-saving treatments in tough times.  The same cannot be said for Cochlear.  Here is the chart.

ResMed has a solid historical performance record, but it is the only stock in the table with a two year earnings growth forecast under 10%.  The company’s Full Year 205 Results showed modest gains of 8% increase in revenue and a 3% increase in earnings per share.  The share price had already been hit back in May when the company announced a failed trial for one of its new devices.  The problem was not with the devices but rather with the patient segment at which the device was aimed, but investors apparently didn’t care as the stock dropped close to 15% at the time.  ResMed has a P/E of 22.47, lower than the P/E of 23.08 for the Health Care Equipment and Services Sector.  

Like Cochlear, ResMed also experienced a decline in share price following the GFC.  Here is the chart.

Goldman Sachs recently noted that ASX-listed “offshore earners” had risen 19% as of 24 July of this year, compared to a 5% jump in the ASX 200.  The strategy of looking at defensive offshore earners seems to make sense.  However, some of these earners, such as packaging companies Amcor Limited (AMC) and pallet and reusable container provider Brambles Limited (BXB) could suffer if a perceived global slowdown morphs into a global recession.  CSL and RHC may be safer plays.

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