Why this growth stock could soar 40%+ within 2 years

Healthcare continues to be a rapidly growing sector. An increasing world population which is also ageing provides a tailwind for sales and profitability across a range of healthcare stocks. As such, share price gains could be ahead for companies operating within the industry. Reporting today is one such stock which could record a capital gain of 40% by 2019.

Improving performance

Georgia Healthcare Group (LSE: GHG) is a dominant company in its local market. In fact, it is the largest healthcare services provider, the third largest pharmaceutical retailer and wholesaler, and the largest medical insurance provider in the East European country. As such, its business is relatively well diversified between the three different divisions.

In the 2016 financial year, it was able to record strong results despite a swing to a loss in its medical insurance division. The loss came after a more challenging year, with one large corporate insurance contract having expired and not been renewed. Despite this, its overall performance was strong. Its sales and pre-tax profit increase by over 70%. Furthermore, it remains on target to deliver a more than doubling of its Healthcare Services revenue by 2018 compared to its 2015 level.

Growth outlook

The sharp rise in sales is set to be translated into rising earnings for the company. In 2017, Georgia Healthcare’s bottom line is forecast to rise by 37%, followed by 40% growth in 2018. Despite this strong growth rate, the company’s shares trade on a price-to-earnings growth (PEG) ratio of 0.8. Therefore, if they were to rise in price by 40% they would trade on a PEG ratio of just over 1, which would suggest fair value for money. Certainly, a higher valuation is possible, but a margin of safety may be required due to the company’s lack of geographical, rather than product, diversification.

As mentioned, the healthcare sector could offer strong growth prospects. As such, a number of other companies within the sector may also be worth buying at the present time. For example, Hikma Pharmaceuticals (LSE: HIK) is forecast to record a rise in its bottom line of 37% this year, followed by further growth of 29% next year. This puts it on a PEG ratio of just 0.7, which indicates that it offers superior value for money when compared to Georgia Healthcare.

Risk factor

In addition, Hikma may be a lower-risk business than its healthcare peer. It operates across the globe and so is not dependent on changes in regulations or trading conditions in one country. Hikma has a well-diversified product portfolio, with its focus on generics arguably providing a degree of consistency which some of its healthcare peers lack.

While the developing world may be emerging from a period of austerity, the cost of treatment for an ageing population may become difficult to afford. Therefore, generics may have a more pivotal role to play in future healthcare requirements, with a growing world population also likely to make them increasingly popular. As such, Hikma appears to be a sound buy, with a lower valuation and greater diversity making it a superior option to even the 40%-plus gains which seem to be on offer through Georgia Healthcare.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.