Medical Devices & Supplies

Medical device stocks should provide investors with opportunities for solid, lower-risk returns over the coming six to twelve months.  Companies providing life-sustaining products should remain insulated from the current economic crisis, as target patients are unable to forego these procedures. The recent slide in the market has left many strong companies looking very attractive.

In the coming year, investors should allocate funds to companies with high earnings quality profiles. We recommend companies with the following characteristics:

    
• Size - Larger companies will find it easier to survive any future liquidity issues and acquire new technologies at cents on the dollar    
• Scope - Companies providing life-sustaining products should remain insulated from the current economic crisis, as target patients are unable to forego these procedures    
• Strategy - Avoid companies that have historically grown by acquisition.

These companies may find it difficult to fund acquisitions, diminishing underlying growth.  Additionally, the financial statements for these companies are often clouded by one-time charges, lowering their quality of earnings.

OPPORTUNITIES

During the third quarter, many of these names performed well on a financial basis.  Areas within our coverage that should perform well include cardiovascular devices and surgical equipment, blood related products, and associated consumables.  As a result of the solid performance and outlook, we upgraded five stocks to BUY.  These names include St. Jude Medical (STJ - Analyst Report), Baxter (BAX - Analyst Report), Becton Dickinson (BDX - Analyst Report), Boston Scientific (BSX - Analyst Report) and CR Bard (BCR - Analyst Report).

WEAKNESSES

Increases in unemployment will reduce the ranks of insured patients. Therefore, we remain cautious on products used in elective procedures, which may be delayed.  One such group is orthopedics, where pricing has been weak. Specific names include ArthroCare (ARTC - Analyst Report), Conmed (CNMD - Analyst Report), Symmetry Medical (SMA - Analyst Report), Stryker (SYK - Analyst Report) and Zimmer (ZMH - Snapshot Report).

Other areas include medication dispensing, delivery, and software. Names in this area include Omnicell (OMCL - Analyst Report) and AllScripts (MDRX - Analyst Report).

Orthotics and prosthetic services is an area where we believe consumers will cut spending during difficult economic times. As a result, we lowered our rating on Hanger (HGR - Analyst Report) to HOLD.