Healthcare was one of the best performing sectors on the Australian Securities Exchange last year, returning more than 40 per cent, compared to less than 20 per cent for the benchmark S&P/ASX 200.
I wrote about its appeal in October of last year as a unique sector that displays both growth and defensive characteristics.
CSL has the most stable share price in the ASX 200 – a very strong characteristic.Credit:Craig Abraham
At the time, I was looking at Cochlear shares finding good support at $200 and being ready to rally higher. So far, that is going nicely to plan. They traded has high as $234.90 Monday.
However, we can’t talk about the health-care sector without mentioning its biggest component – biotech giant CSL.
When looking at the overall market, CSL now ranks in the top-three companies by market capitalisation, vying for top spot with Commonwealth Bank and BHP.
CSL listed in 1994 and its success since then is staggering. A $10,000 investment at that time today would be worth about $4 million, excluding dividends along the way.
Even with a share split over that time, CSL shares are still trading north of $300 each. Because of this and its high price-to-earnings ratio, many investors feel that it is just too expensive to buy.
However, it has the growth to justify its price premium.
Although the shares are trading at near-record highs, they haven't shown any signs of slowing down. The share price grew by nearly 49 per cent last year.
So, although $200 felt like a big number to many people a year ago, in hindsight, it was a bargain.
We are less than two months into the new year and CSL shares have grown a further 20 per cent.
Many investors are still underweight CSL in their share portfolios because its dividend yield is very low. A lot of investors feel that they need to own companies that generate income.
CSL tends to pay about 1 per cent to 2 per cent a year in unfranked dividends.
On the flip side, some investors hold an overweight position in Telstra, which has historically paid about 5 per cent each year, fully franked.
However, if you had the foresight to purchase CSL five years ago instead of Telstra, realising that you are better off investing in companies that can grow, then your CSL dividends payments today in dollar terms would be greater than that received from Telstra.
CSL has grown enough where its 1 per cent per year dividend is now larger than Telstra’s 5 per cent of a falling share price.
Surely then, the share price chart looks dangerous and CSL shares need to pull back?
Not so. In my opinion, CSL has the best-looking chart that you will find in the Australian share market because of its lack of volatility.
Many investors are seduced by stocks that make the headlines because of how quickly their share price has moved.
However, a share that moves up a very steep slope cannot sustain the path forever.
Share prices that move around a lot each day or each week can often leave investors underwater on their investment over great periods of time.
With CSL, it is the least volatile stock in the ASX 200. This is why if you have been waiting for a pullback in CSL to buy some shares, you are probably frustrated at always missing out.
In terms of CSL’s average daily range, it spends the least amount of time under its prior peaks. That makes it the most stable share price in the top 200 – a very strong characteristic.
Every stock on the market has its own character. Trying to understand this is important when analysing share price charts.
Treating CSL like, for example, a gold stock, and waiting for a deep pullback in the share price is a flawed approach.
There are no warning signs on the CSL share price chart, which tells me any pullback should be no greater than the shallow declines which we have been witnessing so far.
Michael Gable is managing director of Fairmont Equities.
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