In this series of articles, I will be taking a look at various industry sectors and selecting what I believe will be outperforming stocks for 2016. For this article, I will review the following Health Care Equipment & Supplies stocks:
- Abaxis (NASDAQ:ABAX)
- Abbott Laboratories (NYSE:ABT)
- Abiomed (NASDAQ:ABMD)
- Accuray (NASDAQ:ARAY)
- Align Technology (NASDAQ:ALGN)
- Analogic (NASDAQ:ALOG)
- Anika Therapeutics (NASDAQ:ANIK)
- Atrion (NASDAQ:ATRI)
- CR Bard (NYSE:BCR)
- Baxter International (NYSE:BAX)
- Becton Dickinson (NYSE:BDX)
- Boston Scientific (NYSE:BSX)
- Cantel Medical (NYSE:CMN)
- Cerus (NASDAQ:CERS)
- Conmed (NASDAQ:CNMD)
- Cooper Companies (NYSE:COO)
- Cynosure (NASDAQ:CYNO)
- DENTSPLY International (NASDAQ:XRAY)
- DexCom (NASDAQ:DXCM)
- Edwards Lifesciences (NYSE:EW)
- Endologix (NASDAQ:ELGX)
- Globus Medical (NYSE:GMED)
- Greatbatch (NYSE:GB)
- Haemonetics (NYSE:HAE)
- Heartware International (NASDAQ:HTWR)
- Hill-Rom Holdings (NYSE:HRC)
- Hologic (NASDAQ:HOLX)
- ICU Medical (NASDAQ:ICUI)
- IDEXX Laboratories (NASDAQ:IDXX)
- Inogen (NASDAQ:INGN)
- Insulet (NASDAQ:PODD)
- Integra Lifesciences (NASDAQ:IART)
- Invacare (NYSE:IVC)
- LivaNova (NASDAQ:LIVN)
- Masimo (NASDAQ:MASI)
- Medtronic (NYSE:MDT)
- Meridian BioScience (NASDAQ:VIVO)
- Merit Medical Systems (NASDAQ:MMSI)
- Natus Medical (NASDAQ:BABY)
- Neogen (NASDAQ:NEOG)
- Novadaq Technologies (NASDAQ:NVDQ)
- NuVasive (NASDAQ:NUVA)
- NxStage Medical (NASDAQ:NXTM)
- Orthofix International (NASDAQ:OFIX)
- Quidel (NASDAQ:QDEL)
- ResMed (NYSE:RMD)
- Rockwell Medical (NASDAQ:RMTI)
- Sirona Dental Systems (NASDAQ:SIRO)
- Spectranetics (NASDAQ:SPNC)
- St Jude Medical (NYSE:STJ)
- STERIS (NYSE:STE)
- Stryker (NYSE:SYK)
- Teleflex (NYSE:TFX)
- Varian Medical Systems (NYSE:VAR)
- Vascular Solutions (NASDAQ:VASC)
- West Pharmaceutical Services (NYSE:WST)
- Wright Medical Group (NASDAQ:WMGI)
- Zimmer Biomet Holdings (NYSE:ZBH)
The first step I took to narrow down the list of possible options was to look at the earnings over the past five years of these stocks within the industry sector. I removed any stock that had negative or flat (less than 2%) growth over the past five years. These stocks included:
- Accuray - (812% decline)
- CR Bard - (69% decline)
- Baxter International - (10% decline)
- Becton Dickson - (40% decline)
- Boston Scientific - (179% decline)
- Cerus - negative earnings
- DexCom - negative earnings
- Endologix - (696% decline)
- Greatbatch - (26.9% decline)
- Haemonetics - (69% decline)
- Heartware International - negative earnings
- Hill-Rom Holdings - (64% decline)
- Hologic - (24% decline)
- Insulet - negative earnings
- Integra Lifesciences - (98% decline)
- Invacare - (212% decline)
- LivaNova - (70% decline)
- Medtronic - (36% decline)
- Novadaq Technologies - negative earnings
- NuVasive - (36% decline)
- NxStage Medical - negative earnings
- Orthofix International - (144% decline)
- Quidel - (25% decline)
- Rockwell Medical - negative earnings
- Spectranetics - (4000% decline)
- Stryker - (2% decline)
- Teleflex - (23% decline)
- Vascular Solutions - (35% decline)
- Wright Medical Group - negative earnings
- Zimmer Biomet Holdings - (62% decline)
I then took the list of remaining stocks and checked the revenue growth of each over the past two years. I am removing any stocks that had flat revenue growth (less than 2%) or a decline in revenue over the past two years. These stocks include:
- Abbott Laboratories - (1.66% increase)
- Analogic - (1.22% decline)
- Conmed - (4.55% decline)
- DENTSPLY International - (7.68% decline)
- St Jude Medical - (0.13 increase)
My next move was to examine the trailing PEG ratio of each of the remaining stocks. I removed any stock that had a PEG ratio over 1.5 to focus more specifically on fairly valued/undervalued stocks. These stocks included:
- Align Technology - 18.03x
- Atrion - 2.47x
- Cantel Medical - 2.93x
- Cooper Companies - 8.09x
- IDEXX Laboratories - 16.33x
- Meridian Bioscience - 8.27x
- Neogen - 4.57x
- ResMed - 13.49x
- Sirona Dental Systems - 5.94x
- STERIS - 2.98x
- Varian Medical Systems - 2.90x
- West Pharmaceutical Services - 5.56x
The next set of data I reviewed was the Fundamental and Value Scores for each of the ten remaining stocks. These scores are calculated by YCharts and I have found them to be very useful when researching investment options. More details on each of the scores can be found here and here.
|Fundamental Score||Value Score|
|Merit Medical Systems||8||2|
|West Pharmaceutical Services||10||3|
To determine the best stocks for 2016, I'm only taking into consideration stocks that have combined scores higher than 10. Doing this left me with the following remaining stocks:
- Anika Therapeutics
- Edwards Lifesciences
- Globus Medical
- ICU Medical
- West Pharmaceutical Services
My next step was to look at the book value of each company and to remove any stock that has seen a decrease in its book value over the past five years. However, none of the remaining stocks saw a decline in book value during this time period.
I then looked at the remaining stocks and only included stocks with earnings yields of 3% or higher in my final analysis. The stocks with earnings yields lower than 3% include:
- Edwards Lifesciences
- ICU Medical
- West Pharmaceutical Services
My next step was to look closer at each stock remaining that passed all previous criteria and determine whether or not there were any reasons to eliminate them as great stock candidates for 2016. In doing so, I reviewed the financials of each company, the most recent quarterly report transcripts, and searched for any news items that warranted concern.
For its last quarter, the company posted a 7.4% increase in revenue and an increase in earnings per share from $0.40 to $0.55 compared to the same period last year. The company displayed increased growth both domestically and internationally, which is especially impressive considering the strength of the U.S. dollar against foreign currencies.
Anika continues to see growth in its product portfolio and with a late stage study of its HYALOFAST product underway along with the upcoming addition of its European headquarters in Padova, Italy, I believe that Anika has a strong chance to reach its 52 week high value of $45.35 this year or even exceed it by years end.
The company expects double digit full year revenue growth, and if that goal is achieved I believe Anika's bottom line increase will be enough to lifts its share price in the short term.
For its last quarter, the company posted a 9.6% increase in revenue and a decline in earnings per share from $0.25 to $0.21 compared to the same period last year. While marketing costs impacted earnings for the quarter, Cynosure saw very strong growth in its domestic business with 29% growth in product revenue. It was internationally where revenue fell flat for the quarter.
With more sales coming domestically, Cynosure was able to increase its gross margin by 20 basis points. The launch of SculpSure should help to continue the company's strong revenue growth moving forward. Cynosure maintains a healthy balance sheet, but I believe that the company's poor international growth will limit price appreciation for the stock in the short term. I think that the stock remains a decent long term play, but I personally would wait for a dip in the stock price before purchasing.
For its last quarter, the company posted a 16.6% increase in revenue and an increase in earnings per share from $0.24 to $0.28 compared to the same period last year.
During the quarter, Globus Medical launched three new products and, like Anika Therapeutics, the company saw sales growth both domestically (17.9% increase) and internationally (1.2% increase).
The company also recently raised its full year guidance, raising its sales estimates by $15M and increasing its earnings per share by $0.03.
With new products and new acquisitions already making an impact, plus an increase in research and development spending ($9,409,000 past quarter compared to $8,146,000 for the same quarter prior year), I believe that Globus Medical is poised to have a solid 2016 in terms of revenue/earnings growth as well as stock price appreciation.
Out of this group of stocks, my top picks are Anika Therapeutics and Globus Medical. Looking at the chart below, you can see out of the final three remaining stocks, Cynosure was by far the best performing stock last year.
However, towards the end of the year, the stock started dropping significantly and fast. That trend has continued so far this year, with the stock losing 15% of its value in the first half of January.
While the other two stocks have not been strong performers so far this year, they have fallen far less than Cynosure. And looking at the performance of the three stocks over the past three years, you can see that Cynosure has underperformed the other two stocks.
I see that trend continuing in 2016, as I feel that both Anika Therapeutics and Globus Medical are better equipped to deal with the strong currency headwinds that all three companies face. This was shown somewhat in the latest quarterly results with both Anika and Globus seeing positive international sales, while Cynosure's international sales dropped significantly.
Taking this into consideration along with the fact that Cynosure is currently priced at a higher valuation than both Anika Therapeutics and Globus Medical based on both trailing and forward PE ratios, I believe that Anika and Globus have more potential to see significant stock price appreciation in 2016 and that is why they are my top picks for this industry sector.
As always, I suggest individual investors perform their own research before making any investment decisions.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.