Over the past five years the ASX Healthcare Index (XHJ) is up about 160%, while the ASX All Ordinaries Index has risen about 25%. The XHJ has been the hottest sector over that period.  Here are the numbers for the other major indices:
XEJ Energy -35%XMJ Materials   20%XNJ Industrials +50% XDJ Consumer Discretionary +65%XSJ Consumer Staples +18%XFJ Financials +50%XUJ Utilities +60%XIJ Information Technology +60% XTJ Telecommunications +70%XPJ A-REIT +65%
In short, Healthcare Stocks have seen more than double the share price increases of the second best performing sector, Telecommunications, over the last five years.  Stocks like Ramsay Healthcare (RHC), CSL Limited (CSL), and Cochlear Limited (COH) have been among the strongest performers on the ASX. Over five years Ramsay is up close to 300%; CSL shares have gone up close to 250%; and Cochlear is up about 120%. 
During that run investors have heard from some analysts and experts numerous times about excessive valuation for these three companies in particular.  Some investors have stayed on the sidelines and watched the share price of these companies go up and up and up.  Others waited for the rare dips in the price movement, bought in, and have reaped the rewards.  
Of the big three Healthcare Stocks, the case for ignoring the expert advice and buying on the dips can best be made by looking at the Cochlear story.
At the close of trading for the week of 5-9 September 2011 the price per share for Cochlear stock stood at $72.18.  On Monday 12 September Cochlear announced a voluntary global recall of its best-selling implant. By the end of the day the share price had dropped to $57.5, a decline of 20%.  One month later on 12 October the price dropped another 13% closing at $49.98, and continued to drop.
In a heartbeat, the experts piled on, predicting declining margins and loss of market share.  Frightened investors rushed to the exits and some bargain hunters were frozen by the dire warnings and ignored the buying opportunity.  While there is no doubt investing at that time came with substantial risk, those who were bold enough to buy in around $50 per share have seen their investment appreciate by 150% based solely on share price.   Take a look at the following 10 year chart for COH from Yahoo Finance.

On 2 September of this year the share price of Aged Care stocks dropped on the news of changes in the regulatory environment in which they operate.  Given the fact governments around the world are inextricably involved in funding this costly sector, it is not surprising the news started a gradual exit from most stocks in the Healthcare Sector.  Selling fever reached a crescendo on 21 October with the news from relative newcomer to the sector, hospital operator Healthscope Limited (HSO) its hospital revenue growth came in slower than anticipated for Q1 of FY 2017, adding to the misery with the prediction of a possible flat EBITDA (earnings before interest, taxes, depreciation and amortisation) result for the full year.  
The stock price predictably plunged, dragging with it the biggest and best of the ASX Healthcare Stocks.  For some investors this dip is a call to action.  The following table lists the historical performance of the major companies along with an interesting smaller company along with recent and year over year price changes.

Obviously the smallest stock in the table, Pulse Health Limited (PHG) went against the trend and the reason why provides more evidence in support of buying Healthcare Stocks on the dip.  
Pulse Health is a small operator of private hospitals (8) and day surgery centres (5) specialising in rehabilitation services and specific treatments such as joint replacement.  On 20 October the company went into a trading halt and the subsequent announcement of a $0.47 per share takeover offer from Healthe Care Australia propelled the stock 30%, from $0.33 to $0.43.  Healthe Care operates 17 hospitals across Australia, making the company the third largest operator of private hospitals behind leader Ramsay Healthcare and second place Healthscope Limited.  Healthe Care was acquired by China’s Luye Medical Group earlier this year.  
For bargain hunting investors, the Healthcare offer can be seen as a statement of confidence in the future growth of private hospitals in Australia, despite short-term setbacks.  Pulse Health reported earnings per share for FY 2016 of 0.1 cents per share.  By FY 2018 analysts forecast EPS to grow to 2.6 cents per share.  The current dip began with the negative news from Healthscope, a newcomer to the ASX that began trading on 28 July of 2014 with a first day closing price of $2.21.  On 28 September of this year the stock price reached an all-time closing high of $3.14. Healthscope has a meager forward earnings growth forecast of +4.5%, which pales in comparison to Ramsay’s +16.2%.
Ramsay’s trailing twelve month (TTM) P/E of 33.26 is substantially higher than the 21.83 P/E for Healthscope, making some shy away from Ramsay as too expensive.  The ten year share price movement chart for Ramsay Healthcare argues otherwise. 

Note the dips in share price in mid-to late 2015 and early 2016 – ranging from 12% to 17% – followed by quick recoveries. Ramsay operates in six countries – Australia, the UK, Italy, France, Malaysia, and Indonesia with a total of approximately 223 hospitals and day surgery facilities.
In sharp contrast to the gloom and doom from Healthscope, on 25 October Ramsay management told the market the company’s Q1 results are exceeding expectations. 
For the full year Ramsay has reaffirmed its core net profit after tax and core earnings per share growth target of between 10% and 12%.  Investors liked what they heard sending the stock price up close to 4% only to see the downward spiral return by the 27th. Investors concerned about Ramsay’s growth should be pleased to learn the company has plans to expand into the community-based pharmacy business, in addition to the 200 or so in-hospital pharmacies it now operates.  As of now the company has 19 community pharmacies in operation in Australia with a ramp up expected into FY 2017.  
Although the company’s much anticipated joint venture with China’s Jinxin Company for private hospitals in China did not materialise, the Chinese government is committed to moving from public hospitals to more private hospitals in the coming decade.  Estimates are as many as 7500 Chinese hospitals will be looking for private operators, with both Ramsay and rival Healthscope potential beneficiaries. 
While not hospital operators, both Cochlear Limited (COH) and CSL Limited (CSL) are also at risk from government involvement as well as from private insurers.  The sad truth is that healthcare costs – regardless of whether it is medical treatment in a hospital; or vaccines or blood treatments from a company like CSL; or medical devices like cochlear implants – have ballooned far beyond the ability of the average consumer to pay for.  Both governments and private insurers place limits on what is covered and how much they are willing to contribute.  Obviously, limits can change and will continue to do so as medical costs continue to skyrocket.  On the bright side for investors, perhaps no other sector is poised to benefit from the typhoon force tailwinds of ageing populations and longer life-expectancies.
CSL is in the business of bio therapeutics.  Basically the company develops, manufactures, and markets treatment for illnesses.  In 2015 the company acquired the vaccine division of Swiss based Novartis, a move tailor-made to capitalise on healthcare tailwinds.  By some estimates the number of people over 60 years of age will grow by 100% by the year 2050.  Growth in the population beyond 80 years old could triple in the same time period.  These are consumers ideally suited to benefit from the kinds of things CSL makes.  
Like CSL, Cochlear invests heavily in research and development (R&D), ensuring its continued market dominance with innovative new products and enhancements to existing products.  The Australian government has provided tax offsets for R&D activity but those are subject to reductions, with a reduction in place for companies with fiscal years starting in July.  While this should be of concern to investors, it is important to remember Cochlear has major facilities around the world, including R&D capability in Sweden, Belgium, and the US.  Although the company’s R&D operations currently take place primarily here in Australia, there is nothing to stop the company for going offshore.  The Cochlear CEO, among others, warned the government of the economic impact of reduced R&D here in Australia.  Unlike some other companies, Cochlear is in a position to minimize the impact of the reduction in the tax offset. 
We have highlighted the biggest Healthcare Stocks on the ASX, but there are others worthy of interest whose share prices have also suffered, including Sirtex Medical (SRX), ResMed Inc. (RMD), Sonic Healthcare (SHL), Virtus Health (VRL), and Primary Healthcare (PRY).

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