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Are GlaxoSmithKline plc, Dechra Pharmaceuticals plc & CareTech Holdings plc On The Cusp Of Stunning Returns?

The healthcare space is a hugely appealing place in which to invest at the present time. That’s at least partly because it offers strong growth prospects at a time when a number of industries are struggling to improve on past top and bottom line rises.

For example, Dechra (LSE: DPH) has been able to increase its earnings at a double-digit rate in each of the last three years, with it rising at an annualised rate of 23% during the period. This provides an insight into the growth potential of pharmaceutical companies, with the veterinary medicine specialist being able to easily beat the market growth rate. This has led to a rise in the company’s share price of almost 90% since the start of 2012.

Furthermore, GlaxoSmithKline (LSE: GSK) is expected to reverse a challenging four year period by returning to positive net profit growth next year. Its earnings are expected to rise by 12% in 2016, with planned cost savings set to have a major impact on its margins moving forward. As was the case with Dechra in the last three years, its share price is likely to react positively and benefit from improving investor sentiment.

Not to be outdone, social care provider CareTech (LSE: CTH) has been relatively consistent in recent years, with its net profit rising in each of the last three years. And, with today’s update showing that the company is making encouraging progress and is performing in-line with expectations, it is due to continue its long term growth trend into next year.

Despite their upbeat growth outlooks, GlaxoSmithKline and CareTech trade on hugely appealing valuations. In the case of the former, it has a price to earnings (P/E) ratio of only 16.1 and a yield of over 6%. Both of these figures indicate that there is considerable upside potential – especially as GlaxoSmithKline begins to realise the potential of its excellent pipeline in future years. Meanwhile, CareTech trades on a P/E ratio of only 7.6 even though its shares have risen by 11% in the last year. This low valuation, alongside a yield of 3.5% which is well-covered by profit at 3.8 times, indicates that there is huge upside potential over the medium to long term.

Dechra, however, appears to have a rather generous valuation. It has a P/E ratio of 22.6 and, while its financial performance has been exceptionally consistent in recent years, its rating could come under pressure. As such, there could be less share price growth potential from a rerating than is the case for GlaxoSmithKline and CareTech, although investors seeking a more stable operation may wish to favour Dechra.

Of course, a hugely appealing aspect of all three companies is that they are less highly correlated with the wider market than most of their index peers. With the outlook for the global economy continuing to be uncertain, increasing exposure to the likes of GlaxoSmithKline, CareTech and (to a slightly lesser extent) Dechra, could prove to be a sound long term move.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.