Healthcare stocks have performed for investors since early 2011, delivering capital growth and dividends. However, since mid 2013 the rate of share price rises has slowed considerably, as judged by the healthcare index. The defensive nature of healthcare earnings may start  to work against the sector as confidence in global growth prospects continues to improve. Despite a good long term outlook, recent reports and changing share price behaviour suggests it's time for investors to consider reducing healthcare holdings.

The largest stock in the sector is CSL. A great Australian success story, the blood products manufacturer has rewarded patient investors, more than doubling in price over the last two years:

chart of csl's share priceA number of red lights are flashing on the weekly chart. Like the sector, the recent rate of growth has slowed - trading largely sideways since mid 2013. Recent action is erratic in both directions - pushing through previous highs as well breaching the up trend line.

CSL announced its half year result on February 12. Despite reporting largely in line, the share price tumbled by more than $3 per share:

20140224 csl dly

The primary evidence (price action) suggests the dynamics that drove CSL for the last couple of years are breaking down. Sentiment has reversed sharply a number of times in the circled area. Note all the gaps between daily prices. Volatility (red line) is picking up again. Additionally, CSL should be a beneficiary of a lower AUD/USD, yet this is hard to detect on the chart.

Why is CSL's share price action changing?

The answer may lie with the fundamentals. CSL is expensive on most valuation measures - although that has been the case for a long time. Trading on a forward PE around 23 times, analysts and investors have relied on a long term growth rate around 15%. Any slips at these levels can be very expensive for shareholders - especially where there is little dividend yield to lean on.

After EPS growth above around 23% in FY2013, the most recent report shows an annualised rate of 7%. While there are good reasons to suggest CSL can return to higher growth rates, the risk of failing are high. In my view, this risk is not currently reflected in the share price.