Sometimes the classification of stocks is very misleading by the main sources of stock information on the internet. However, I have come across three stocks that are great growth at a reasonable valuation plays, while having bullish technical patterns.
While one is listed in the financial sector, one in technology, and one in healthcare, the stocks should all be listed under the healthcare heading.
These stocks are three that you can buy and hold for a year or more and expect a significant outperformance to the market, as the firms are at cheap valuation, growing faster than competitors, and best positioned for capital budget improvements for hospitals.
Merit Medical Systems (NASDAQ:MMSI): Merit has broken out of an inverse head and shoulders pattern with increased volume moving into the name. Shares are a bit rich at 17.5X forward earnings, and 34.7X free cash flow, but it is growing earnings on a yearly basis at more than a 25% growth rate. The company makes disposable medical devices for the radiology and cardiology segments of healthcare, the fastest growing area in terms of highest profit margins and number of procedures. Another area that Merit operates is in stent removal, which has been in the media’s focus as many old stents are showing new health risks.
Merit generates a substantial portion of revenues from cancer diagnostics, at which it is a leader in quality and competitively prices its products, and around 30% of its sales are International. The Street is undervaluing this innovative company that is growing much faster than peers and has a bullet proof balance sheet.
Catalyst Health Solutions (NASDAQ:CHSI): Catalyst is near a horizontal channel breakout at $25 that would imply a move to around $35, and shares have a strong trend higher. Catalyst is a pharmacy benefit manager that goes unnoticed compared to Medco (NYSE:MHS) and Express Scripts (NASDAQ:ESRX). PBM numbers have been strong from recent Walgreens (WAG) and CVS (NYSE:CVS) reports.
Catalyst trades just 14.7X forward earnings, 0.4X sales, and 12X free cash flow, making it cheaper than its larger competitors, while having less debt and similar growth rates. Earnings are scheduled for August 5th and I am expecting a very positive report based on industry trends, and although the company lacks analyst coverage, hopefully more investors will catch word of this great value and growth play.
Vital Images (NASDAQ:VTAL): Vital Images broke out of a descending triangle and above its 200 day exponential moving average on a significant volume increase, despite overall low market volume, which signifies the end of a longer term down trend and the start of a new uptrend. The company provides software for the visualization of images for the medical industry, such as CT scans for radiologists. Hospitals are currently experiencing rapid growth in CT scans, and this image software is critical in diagnosing health issues.
Vital’s advanced 3D and 4D imaging is gaining more acceptances in the industry. The risk is that hospitals have been cutting budgets, and equipment purchases are down, but because Vital supplies software for the most profitable segment in healthcare, it feels a smaller impact.
Vital Images has the largest market share in 3D visualization at more than 32% compared to its large competitors such as Phillips (NYSE:PHG), Siemens (SI), General Electric (NYSE:GE) and others, and the company is more adaptable to market conditions.
Vital is expected to report earnings on August 5th, and I can see shares exploding higher on excellent results, and a lot of money can be put to work with this $177M market cap company with just a 14.1 million share float. The company is under-appreciated, and this sleeper pick could be set to return to 2007 levels around $35, a triple from current prices.
Disclosure: No holdings, but considering longs ahead of earnings