Great investment idea for 2018

I’ve had my fair share of hospital stays. Nothing serious, thankfully, but let’s just say I’m familiar with the workings of a hospital and its clinics.

My most recent visit to hospital was for the birth of my daughter.

Over the best part of the week, I experienced many of the services a hospital has to offer. I gained an intimate understanding of the business of healthcare.

Billionaire investor Warren Buffett famously advised people to invest only in what they know, or an area they’re familiar with. It makes sense. You need to be well-versed in the inner workings of a business before you throw your hard-earned money behind it to help it grow.

So, if you’ve experienced the workings of a business first hand, you’re well placed to make a judgement on its strengths and weaknesses.

What I’ve seen of the healthcare system over a lifetime, and my recent trip to hospital, along with societal demographic changes, leaves me in no doubt that that healthcare system is worth a look as an investment.

Strong demand

Late on a Monday morning, the all-nighter I pulled the previous night looking after a new bub started to catch up with me. I made my way to the lift. I was in search of a strong coffee.

I stood in the lift bay for around 10 minutes. Why the long wait? Well because every lift that came to my floor, and opened up, was jammed full of people.

There are a few reasons why people go to hospital. One is to visit family and friends. Other reasons include when you yourself are sick, or when you need to know if you’re sick or not. Admittedly many folks who aren’t sick, and who are perhaps a little paranoid about their health, contribute to the demand for hospital services. However, I imagine the majority of outpatients have legitimate health concerns. And there are a lot of outpatients!

This is especially true given Australia’s ageing population. It is related to both sustained low fertility, and increasing life expectancy which results in proportionately more elderly people. According to the Bureau of Statistics, the number of people aged 65 years and over is projected to exceed the number of children aged 0-14 years around the year 2030.

All of these people put extra strain, and demand, on the healthcare system. For investors, that translates into a sustainable growth pipeline for all the associated support services.

Well run

Of course, demand, for any business, is crucial for growth. Equally important though is good management and a well-run organisation.

My experience of Australian hospitals, both public and private, as well as the healthcare services that support hospitals and the sick, more generally, is that they’re well run.

There are always exceptional circumstances. I’m very aware of hospital waiting lists, the lack of beds, sleep-deprived staff, expensive health products, and unnecessary surgery. But, on the whole, healthcare services are well run.

Indeed, considerable effort goes into improving services. I attended a few prenatal classes in the lead up to the birth of my daughter, for example. Mums and dads that have gone before haven’t necessarily had such services. Especially Dads. Were they helpful? Somewhat, sure. Did lots of expecting parents attend? You bet. And why not? There were ‘free’ sandwiches!

These services are a cash cow in the private sector. In my experience, these sorts of services appear in many different areas of the healthcare system. Management work out what stresses people out, and they shift resources to those areas… in order to make money.

Internationally competitive

Donald Trump recently conceded that Australia had a better healthcare system that America. That’s true. It’s partly because Australia has the money to follow world’s best practice but still avoids the issues that come with a large population (like Britain, for example).

Australia also attracts world class surgeons, physicians, scientists and researchers. Seriously, why wouldn’t you want to live here? It’s beautiful.

Investment decision time

So, given all of that, here are a few examples of how you can translate that knowledge into an investment decision.

Who runs many non-government hospitals? Ramsay Health Care. The stock has enjoyed pretty solid growth over the past 5 years (more than doubling its price).

What about products and services? What stocks are available on that front? ResMed.

ResMed is also a good company with a relatively niche market in Sleep Apnea.

However, it does face growing competition from the likes of Fisher & Paykel Healthcare and other providers. In addition, from a stock valuation perspective (its price to earnings ratio), it looks a little expensive. Its dividend yield is also uninspiring. Its stock chart looks great though.

CSL is another company worth looking at. It’s one of only a handful of Australian companies with a history stretching 100 years. But its recent news around CSL that’s caught my attention.

The biopharmaceutical company is deepening its exposure to the healthcare space. It clearly wants to be known as more than just a blood plasma and vaccines business.

The board has given the green light on phase 3 trials for its cardiovascular drug, “CSL112”, worth roughly $720m, over the next four years.

However CSL suffers from the same problem other large healthcare stocks face though in that the market is viewing it as expensive at its current price.

Cochlear is also worth looking at. The hearing device company has an impressive history of shareholder returns (especially capital gains since 2012).

@DavidTaylorABC