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IHI: Medical Device Stocks Have Outperformed, But Now Appear Expensive


  • IHI invests in U.S. companies that manufacture medical devices, instruments, and equipment or involved in diagnostics testing.
  • IHI has significantly outperformed the broader healthcare sector and the S&P 500 in recent years supported by strong growth of its underlying companies.
  • This article looks at trends in the performance and valuation of the underlying portfolio holdings.
  • I do much more than just articles at Core-Satellite Dossier: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

The iShares U.S. Medical Devices ETF (NYSE:NYSEARCA:IHI) invests in companies that manufacture a wide range of instrumentation and equipment for the healthcare industry along with companies involved in diagnostic testing. This has been a strong market segment over the past decade supported by multiple fundamental tailwinds including higher healthcare spending, adoption of more complex technologies, and trends in an aging demographic. The ETF is up over 65% in the past three years, impressively outperforming the S&P 500 index which is up by 35% over the same period. Recognizing a still overall positive outlook for the group, greater macro uncertainty in early 2020 coupled with some emerging valuation concerns lead us to a more cautious view on IHI.

(Source: finviz.com)

IHI Background

The Medical devices ETF is a relatively concentrated portfolio including only 56 underlying stocks. The fund uses a market capitalization methodology and only includes U.S.-based companies. Keep in mind that some of the companies in the ETF like Medtronic PLC (MDT) and Steris PLC (STE) are technically headquartered in other countries for tax purposes, but are included in the ETF based on their operating profile and exposure to the U.S. Healthcare system. Overall, this is a large-cap fund with most of the companies recognized as leaders in their respective segments while others may be direct or indirect competitors of each other.

(Source: iShares)

As mentioned, one of the themes supporting the growth outlook for medical devices is the increasing adoption or transition towards more complex and high-tech treatments in healthcare. By this measure, the companies here are often interconnected with other healthcare industries like pharmaceutical and biotech which represent important customer segments.

While medical device companies often face strict product-level regulation, in some ways the businesses here are less exposed to political policy uncertainty that has pressured other areas of

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This article was written by

Dan Victor, CFA profile picture

Dan Victor, CFA is a market professional with more than 15 years of investment management experience across major financial institutions in research, strategy, and trading roles.

Dan leads the investing group Conviction Dossier, where his focus is on helping investors stay ahead of market trends and inflection points. Dan’s investing vehicles of choice are growth stocks, tactical exchange-traded funds, and option spreads. He shares model portfolios and research to help investors make better decisions, via his Investing Group’s active chat room.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (4)

Awayk profile picture
I'm long IHI and appreciate the author's POV regarding valuation. Thank you! On some level think the real question is if Covid-19 will change the near-term trajectory of the market or not. If the virus effects are bad you probably don't want to be in equities and if it passes with warm weather or whatever then this ~12% dip is a buying opportunity. No plans to sell.
IHI is the a good way to invest in healthcare.
Thanks B/L
Balance sheet guru profile picture
IHI is a great ETF that I hold.. I'm sticking around. Medical devices and equipment will be more needed as population increases.
Augustus profile picture
It is not so much the increase in population as it is the aging of the population. Joint replacement is getting pretty common. Also the insulin delivery systems are getting common. Of courses, most cases of arthritis and diabetes are self induced illnesses due to diet choices. That over 60 aged population % will be really expanding. And Medicare covers the equipment so it is very little out of pocket. When devices have new models they can avoid some attempts at price controls.
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