Healthcare in the US often seem oversized, overfunded and out of touch, but investors may want to ignore the congressional wrangling and media hype, and pay attention to actual trends in healthcare. The US spent $2.7 trillion on health in 2011.
On the one hand, this contributes to the deficit and draws money away from other public issues, as the federal government paid just under half of that amount. But on a more local level, healthcare spending creates jobs and supports companies that provide medical services and produce medical devices, among other things. And many people expect spending on healthcare to continue to grow, as our population ages and more features in the Affordable Care Act kick in.
So we set out to generate a list of healthcare stocks that investors might find attractive buys.
Building the List
To create this list we began by searching for healthcare stocks, specifically manufacturers of medical supplies, that are trading at significant discounts to their fair value based on analyst target price, with the assumption that they will move up to their fair value in the near future.
We only included stocks with five or more analyst ratings, and only those that imply a potential upside of at least 15% based on the lowest target price. And because analyst prices are notoriously inflated, we compared current price to the lowest target.
This left us with three stocks on our list, so we decided to look at each one in more detail. Two companies, Accuray Inc. (ARAY) and Tornier N.V. (TRNX), are experiencing significant hedge fund buying, with net institutional purchases over the last quarter representing at least 5% of share float. This indicates that institutional investors such as hedge fund managers and mutual fund managers expect these stocks to outperform in the future.
The third stock, Endologix Inc. (ELGX), is demonstrating positive trends in inventory, namely growth in quarterly revenue greater than growth in quarterly inventory. Since inventory represents the portion of goods not yet sold, faster growth in revenue than inventory is considered an encouraging sign.
And while data is not currently available for two of the three stock's predicted earnings per share for the next five years, all three companies are predicted to grow their EPS by significant amounts over the next year.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do these medical device companies present attractive investing options? Use the list below as a starting point for your own analysis.
1. Accuray Incorporated : Designs, develops, and sells the CyberKnife system, an image-guided robotic radiosurgery system used for the treatment of solid tumors.
- Market cap at $392.84M, most recent closing price at $5.30
- EPS: -1.35
- EPS this year: 128.86%
- EPS next year: 64.30%
- Of the 5 analysts that have set a target price on the stock, the lowest price target stands at $6.5. This implies a potential upside of 25.24% from current levels around $5.19.
- Net institutional purchases in the current quarter at 16.4M shares, which represents about 25.95% of the company's float of 63.20M shares.
ARAY has recorded great gains over the last month, when compared to competitors. The stock returned 20.23% since 4/29/13, better than Medtronic, Inc. (MDT) Integra LifeSciences Holdings Corp. (IART) and Abbott Laboratories (ABT), which returned 10.97%, 7.0% and 4.98%, respectively, during the same holding period.
The company's earnings growth has disappointed, with EPS growing by -128.86% over the last year. This is considerably weaker than industry peers like Intuitive Surgical, Inc. (ISRG) (EPS growth over the last year at 29.72%) IsoRay, Inc. (ISR) (EPS growth over the last year at -7.71%) and MDT (EPS growth over the last year at 4.72%).
ARAY has released results from a clinical study of its CyberKnife Robotic Radiosurgery System, conducted over five years involving 304 patients. The device was deemed effective in patients with low to intermediate risk of prostate cancer, and found few side effects and little to no impairment of normal daily functions and lifestyle post-treatment.
2. Tornier N.V. : Operates as a medical device company that designs, manufactures, and markets devices for joint replacement and soft tissue repair that enable surgical specialists to improve patients' lives by restoring motion and physical vitality.
- Market cap at $771.04M, most recent closing price at $16.61
- EPS: -0.70
- EPS this year: 31.88%
- EPS next year: 88.00%
- Of the 9 analysts that have set a target price on the stock, the lowest price target stands at $20. This implies a potential upside of 18.20% from current levels around $16.92.
- Net institutional purchases in the current quarter at 1.7M shares, which represents about 7.91% of the company's float of 21.50M shares.
TRNX has returned -6.97% since 4/29/13, and is one of the worst performing stocks in its industry. The stock is falling behind companies like Zimmer Holdings, Inc. (ZMH), Becton, Dickinson and Company (BDX) and Unitedhealth Group, Inc. (UNH), which returned 6.05%, 7.50% and 5.55%, respectively, during the same time period.
TRNX has a higher than average projected earnings growth rate over the next 5 years (20.0%). This is higher than the likes of BDX (projected EPS growth over next 5 years at 8.99%) and Covidien plc (COV) (projected EPS growth over next 5 years at 8.10%).
According to The New York Times, TRNX supplies roughly 100 products in over 40 countries, divided between upper extremity joints and trauma, lower extremity joints and trauma, sports medicine and biologics, and large joints and other.
3. Endologix Inc. : Develops, manufactures, markets, and sells minimally invasive treatments for aortic disorders.
- Market cap at $858.48M, most recent closing price at $13.67
- EPS: -0.47
- EPS this year: -17.82%
- EPS next year: 168.70%
- Of the 6 analysts that have set a target price on the stock, the lowest price target stands at $17. This implies a potential upside of 22.21% from current levels around $13.91.
- Revenue grew by 21.45% during the most recent quarter ($29.78M vs. $24.52M y/y). Inventory grew by -4.62% during the same time period ($18.6M vs. $19.5M y/y). Inventory, as a percentage of current assets, decreased from 36.48% to 21.09% during the most recent quarter (comparing 3 months ending 2013-03-31 to 3 months ending 2012-03-31).
ELGX has returned -4.65% since 4/29/13, has been performing poorly compared to its industry. The stock is not keeping pace with companies like Cardiovascular Systems Inc. (CSII) and CR Bard Inc. (BCR), which returned 11.64% and 7.08% during the same time period, but is still ahead of HCA Holdings, Inc. (HCA), which returned -5.10% during the same period.
The company's earnings growth looks weak, with EPS growing by -17.82% over the last year. This is considerably worse than competitors like BCR (EPS growth over the last year at 67.12%), and Abiomed Inc. (ABMD) (EPS growth over the last year at 882.88%), but better than CSII (EPS growth over the last year at -33.18%).
ELGX most recent earnings report, for Q1 2013 featured a 22% increase in global revenue, at $29.8M. The company recently received FDA approval for its new percutaneous EVAR indication product, and physician training courses for the device began this month.
*Target price data sourced from Yahoo! Finance, institutional data sourced from Fidelity, accounting data sourced from Google Finance, all other data sourced from Finviz.