Fresh Stock Picks in the Medical Business
There's no industry in the US that's been booming quite like the medical business as baby boomers head into senior citizen territory while Obamacare vastly expands the number of patients with access to insurance. Investors have a variety of options for medical stocks, with a variety of familiar names at the top of the list: Johnson + Johnson, Pfizer, Merck, et al. When looking for good growth stocks, however, investors won't find much to cheer about on the lists of the Fortune 500, where most medical companies have too large a scale and too wide a market saturation to grow by anything other than low to moderate pace. What are some choices for under-the-radar medical stocks that are on the cusp of a breakout?
There's a reason that the average surgeon makes half a million dollars per year. The amount of skill needed to pull out a tumor or close up a wound or replace a cornea trumps just about every other job on planet Earth, requiring four years of medical school along with nearly a decade of residency work. Surgeons surely won't go away any time soon, but emerging devices continue to make their jobs easier and increase the success rate of surgeries both minor and major. RTI Surgical (RTIX on the NASDAQ, trading for $6.12 a share) looks like they could be the go-to medical supply company for a variety of surgical instruments after their stock price soared by 50% in 2015, reaching historic highs after taking a beating during the recession. There's a lot to like about RTI: their revenue streams are growing by double-digit percentages each year while their profit grows by an average of 8% per year for the past three years. CEO Brian Hutchinson has made no bones about the company's future: he wants to up revenue to half a billion per year (currently a little over half that figure) and improve their operating margins threefold compared to 2014 levels. RTI features three major product segments: bone grafting technology, biological implants, and synthetic hardware. They have a bit of risk (.8 beta) compared with more established med-tech companies, but a lot of room to grow and a lot of ambition not to rest on their laurels.
One of the biggest problems in America's obesity crisis, other than obesity itself, is the epidemic of diabetes that's pervasive across Americans both young and old. As bad as the problem is in the US, it's even worse in some nations, most notably Mexico, without access to higher quality healthcare, with the UN Health Organization suggesting that a quarter of a billion persons worldwide will become diagnosed with diabetes in the next two decades. The influx of diabetes patients is making shares of DexCom stock (DXCM on the NASDAQ, trading for $99.89 a share) surge since their products are almost exclusively for the diabetic market. The numbers alone suggest why DexCom deserves a place in anyone's portfolio. Their Q2 sales in 2015 have jumped by nearly sixty percent -- that's not a typo -- to nearly $100 million. If that's not enough, add on the biggest name in all of business as a corporate partner: Google, who will team with DexCom to develop a series of biosensors for diabetics. While diabetics of a previous generation had to rely on pricking fingers to draw blood, today's blood sugar testing methods are painless and easy. DexCom develops disposable sensors that can monitor the chemical changes in blood without needing to pull it out of your veins. It's a tight race in that market, with competitors like CCS Medical and Liberty, but a glance at the upward trajectory of DexCom's financial performance over the company's history (only one negative earnings quarter in the past five years) and their stock (doubled since 2014, quadrupled since 2013) makes them an easy front-runner for growth.
While RTI Surgical is providing physicians with the tools they need to do the job, Intuitive has been upping the ante by providing physicians with robots to do the job for them. Intuitive stock (ISRG on the NASDAQ, trading for $504.94 a share) might be the world's best medical robotics company, launching products that can either assist a surgeon in performing microcuts or do the job directly. Look up their robots on an image search and you'll see something that more resembles the medical deck from Star Trek than today's operating rooms. Their business model has a number of advantages: due to the costs of buying and installing a robot, Intuitive has effectively created customers-for-life due to the extreme costs of switching to another brand. Likewise, they can sell disposable tools like scalpels and syringes that only fit their own robotic devices. A combination of small touches and giant robots makes Intuitive a fantastic buy, currently trading at a price that's no less than thirty-eight times their trailing earnings, an indication of surefire success on the market. While their stock is a bit more volatile than the others on this list, it's seen 20% growth in the past 52 weeks but is trading at eight-week lows, making it a good stock for growth as well as a solid value buy.
- The Takeaway: while it's hard to predict the biggest medical tech companies of tomorrow, there's a few prospects that appear to have very strong futures ahead of them. RTI, DexCom, and Intuitive should be added in most portfolios, especially those looking for solid growth. Since developing medical index funds will likely feature one or more of these companies, investors looking for less risk can choose an index fund like the Vanguard Small-Cap Growth to get reliable growth with less risk.
- Of all the aforementioned stock picks, DexCom appears to be the most reliable. Their stock has had only two months in the past thirty-six with negative net growth. You'd be hard-pressed to find a more consistent performer on the market today.