STJ ST. Jude Medical, Inc.

Picking the right stock is never easy, especially in a difficult and volatile market. There are thousands of stocks to choose from and many investors eventually end up boiling the ocean.

The U.S. economy continues to be cramped by a spate of headwinds including a still unstable job market, high debt, a soft housing sector and last but surely not the least, the European sovereign debt contagion, which have hit industries across the board. The recent EU summit did not bring out any concrete solution to staunch the debt crisis which began in Greece in 2009.

The healthcare sector, traditionally revered as a safe haven for investors and one of the most preferred areas to take cover in the midst of market volatility, has been somewhat proved not immune to the global economic tumult as several leading players looked to be out of favor, making many investors skittish about these stocks.

Yet, year-to-date, the health care sector has outperformed the S&P 500 (up 8.35% versus a 1.3% loss for the S&P 500). So, where are we heading in 2012?

Patchy Year but Better Days Ahead

Like 2010, this year proved to be challenging for MedTech stocks given the exigent economic conditions and a precarious healthcare environment. The industry is hamstrung by several issues, including pricing concerns, hospital admission and procedural volume pressures, uncertainty surrounding healthcare reform, Medicare reimbursement issues (including concerns over the new pre-payment review program) and regulatory overhang (overhaul in the device approval process), which have left many investors scratching their heads.

With fewer patients going under the knife accompanied by concerns of overuse of devices, companies in cardiovascular and orthopedic domain had gone through a rough patch in 2011. 

Yet, the MedTech industry weathered the economic vortex better than many others and is emerging as an important contributor to economic recovery. Although the sector is still weighed down by the macro mayhem, the industry is expected to fare relatively better next year thanks to several attractive growth opportunities and healthy tailwinds (includes improving hospital spending, emerging markets and pent-up demand).

Strike While the Iron is Hot?

Given the industry headwinds, many stocks in the MedTech universe are trading close to their 52-week low and under the analysts’ median price target. Some of the stocks are also trading below their 50-day and 200-day moving averages. Many of them have lost a third of their valuation this year.

The pullback bestows an entry point for investors to grab some quality stocks in this sector with attractive prospects that augur well for long-term growth. As Peter Lynch said, “I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy."

Which Stocks to Choose?

As we all brace ourselves for 2012, here’s some food for thought on picking value MedTech stocks for the new year. Going into 2012, we advocate companies providing life-sustaining products and procedures, given their healthy recurring revenue stream.

Further, investors should look for stocks with strong earnings quality, healthy growth trajectory, and liquidity profiles as they appear attractive considering their ability to leverage strong balance sheet and cash flows in maximizing shareholder value in form of dividends and share repurchases or use them for value acquisitions.

MedTech Companies with vast product range/healthy pipeline and strong infrastructure are also better poised for improved returns. Moreover, companies focusing on more judicious R&D investment, expansion into new markets and cost-saving through restructuring are better placed for 2012.

Moreover, investors could also scoop up low-beta stocks (beta less than 1) in the current rickety market environment. Companies with low beta are less volatile than the overall market and hence are considered defensive stocks with low risk. Moreover, stocks with healthy dividend yields offer a cushion against market volatility.

Top Picks for 2012

St. Jude Medical (STJ): It is better placed among the top-tier, pure play medical devices stocks in the cardiovascular arena. The company has a number of levers to pull and represents a good bet for long-term investors. St. Jude is consistently producing positive earnings surprises and healthy revenue growth and is poised for growth on the back of strong cadence of new products (including the quadripolar pacing system). 

Boston Scientific (BSX): The numero uno in the drug eluting stent (“DES”) market. The earlier-than-expected recent approval of the next-generation DES product Promus Element coupled with a new line of ICDs better places the company for 2012. Moreover, Boston Scientific is expanding its footprint in the emerging markets for growth and maintains a positive earnings surprise streak.

Medtronic (MDT): It is the largest medical devices company on the planet. Despite weaknesses in its key ICD and spinal implants businesses, we like the company’s efforts to augment/diversify its product range, expand into emerging markets for growth, strong cash and healthy dividend yield. Besides, the new MRI SureScan pacemaker and Protects ICDs should offer support to its core CRDM segment.

Intuitive Surgical (ISRG): Robotic surgery is another area which appears to be better placed for growth in 2012 and Intuitive clearly leads the pack with its state-of-the-art technology. Intuitive enjoys a virtual monopoly in robotic surgery and continues to deliver forecast-topping earnings. Its sales are growing at a torrid pace buoyed by the da Vinci surgical system.

Thermo Fisher Scientific (TMO): The leading, diversified scientific instrument maker has been successful in expanding operating margins over the past few quarters on the back of operational efficiency and cost discipline. It has strong international exposure and is focusing on acquisitions and emerging market for growth.

ZOLL Medical (ZOLL): Another good pick is resuscitation devices-maker ZOLL Medical. It is a leading player in the global market for external defibrillators, and its LifeVest wearable defibrillator business continues to grow at a healthy quarterly run rate.

Stryker (SYK): Orthopedic remains a weak spot in MedTech given the sustained pricing and volume pressure. While it is still not a favourable area to invest, ortho kingpin Stryker represents a good value proposition. The company is poised for growth riding on its diversified business, new products, acquisitions and recovery in capital spending by hospitals. Given its less exposure to metal-on-metal (MoM) hip implants, Stryker is well placed to gain share in the hip market in 2012.

 
BOSTON SCIENTIF (BSX): Free Stock Analysis Report
 
INTUITIVE SURG (ISRG): Free Stock Analysis Report
 
MEDTRONIC (MDT): Free Stock Analysis Report
 
ST JUDE MEDICAL (STJ): Free Stock Analysis Report
 
STRYKER CORP (SYK): Free Stock Analysis Report
 
THERMO FISHER (TMO): Free Stock Analysis Report
 
ZOLL MEDICAL CO (ZOLL): Free Stock Analysis Report
 
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