Reeling from its recent $150 million product recall, Cochlear shares continue to struggle in the face of persistent negative investor sentiment.

Why is it that investors have turned their backs on a company that has served them so well? Long-term shareholder of Cochlear shouldn’t forget the company has consistently grown its earnings, delivered on expectations and successfully maintained dividend payments, offering greater stability and support to its shareholders throughout the Global Financial Crisis and into 2011than just about any other listed Australian company.

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So what should we make of the latest product recall from the world’s leading bionic ear manufacturer?

Firstly, it’s going to cost the company an estimated $20-30 million. Not to mention the sharp dent in reputation for a company that leads the world in advanced hearing technology. Figures released this week indicate the recall will represent a hit of 11-16% on a full year’s earnings. Dilute this across several years of better than expected earnings and dividend growth, an exceptional handling of the product re-call and the relatively low expected long-term impact on the company, and suddenly the harsh-treatment of Cochlear’s share price seems a little over-done.

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Cochlear shares have retreated some 35% from their April highs to levels not seen since before the introduction of their industry-changing Nucleus 5 hearing implants.

Cochlear took the hearing industry by storm. It capitalised on its ground-breaking technology in U.S., Australian and European markets but the company is still to complete its foray into developing markets, which represents billions of dollars in potential revenue in years to come. And with the transfer of Western wealth to China and India in particular, the potential market for Cochlear is astronomical.

In times of economic uncertainty, it pays to have a defensive slant to a well-balanced portfolio. This means holding companies that perform regardless of economic conditions, whose products are in demand despite tightening purse strings and whose cash-flow can withstand unexpected circumstances. Cochlear is the ideal addition to re-weight a portfolio and gain exposure to a darling of the healthcare sector.

Cochlear continues to achieve profit growth, pay dividends and make headway in challenging times, yet shareholders are turning their backs as a result of a product re-call that is unlikely to make any long-term dents in the reputation or profitability of one of the best income-based stocks on the Australian market.

Get Cochlear while it’s cheap because the product recall may just be a bump in the road.

Stay ahead of the game,

Lachlan McPherson