The S&P/TSX Composite Index, Canada’s broad stock market gauge, gained 395.6 points on Wednesday to post a near 2% gain yesterday. One usually docile sector’s sub-index, Health Care, gained 4.2% – a strong performance that was only surpassed by Battery Metals’ 4.9% gain for the day.
Markets are getting more exciting as 2023 comes to a close. If current momentum sustains, one top Canadian healthcare stock could be a good buy on the TSX today for capital gains and passive income windfalls in 2024.
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How to find top TSX healthcare stocks to buy
One easy way to find top healthcare stocks to buy is by looking through sector indices. Index constituents are usually leaders in their economic sectors that enjoy some size advantages and cost efficiencies, and their stocks usually enjoy higher trading volumes usually due to high demand from index-following institutional money managers, and purchases by a plethora of exchange-traded funds (ETFs).
Due to high institutional demand and wide analyst coverage on index stocks, any positive developments at the company level will most likely get priced into the stock sooner rather than later. As a result, individual investors may bank capital gains on index stocks earlier due to their higher valuation efficiency.
The TSX Health Care Capped Index’s four constituents each posted between 3% to nearly 6% Wednesday. The sector index is composed of Bausch Health Companies, Chartwell Retirement Residences (TSX: CSH.UN), Sienna Senior Living, and Tilray Brands stock.
Although Tilray Brands’ 5.7% gain Wednesday and an 11% surge during the past month make it one of the best index performers, I expressed my broad concerns over the prospects of the Canadian cannabis industry back in October 2020. Outlined industry challenges continue to weigh against investing in Canadian pot stocks as long-term holdings. I would personally make a pass on Tilray stock for now.
Among the remaining three top TSX healthcare index stocks, Chartwell Retirement Residences is my favourite pick for new money right now.
Why buy Chartwell Retirement Residences stock today?
Retirement homes and old-age care services are big businesses today, and the opportunity will likely grow as the Canadian population continues to grow and individuals live longer.
Chartwell Retirement Residences is Canada’s largest old-age homeowner and long-term care provider. It is efficiently structured as a Canadian Real Estate Investment Trust (REIT) that distributes the majority of its income to investors through regular monthly distributions.
The $2.7 billion trust owns senior residences in Ontario, Quebec, Alberta, and British Columbia and has registered growing portfolio occupancy rates over the first three quarters of 2023. Occupancy levels surged by 300 basis points year over year to 81.4% for the third quarter of 2023 and management expects to report 84.2% occupancy levels by the end of December.
The horrors of COVID-19, which could have affected retirement home occupancy levels, are behind us, and Chartwell’s growing occupancy rates mean higher same property net operating incomes, higher cash flow generation rates, and better credit metrics going forward.
In recognition of Chartwell Retirement Residences’ improving business metrics, credit rating agency DBRS-Morningstar recently upgraded the REIT’s credit rating. Last month, DBRS-Morningstar changed Chartwell’s credit rating trend from negative to stable, and confirmed its investment-grade BBB(low) rating for the trust.
The trust’s funds from operations (FFO) from continuing operations grew 27.6% year over year in the third quarter of this year. Growth in distributable cash flow generation means better coverage for Chartwell Retirement Residences’ monthly distribution, which currently yields 5.5% annually.
A high-flying healthcare stock
Chartwell Retirement Residences units have produced a 40.3% total return to investors so far this year – outperforming most Canadian REITs in 2023. Despite a fine run this year, units still trade cheaply at a price-to-tangible book multiple of 2.5, which compares favourably against a North American industry average of 10.8.
