“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.” – Seth Klarman
Indeed, ahead of the race to the 2016 U.S. Presidential election, the investment scenario in the country looks rather tense. Investors are becoming more skeptic by the day as speculations fill the air about the best industry to bet on at the moment. Historical trends also portray a picture of disagreement between the stock market and the Presidential election. According to a MarketWatch analyst, historically, in presidential election years, the S&P 500 has posted an average return of 6.5% versus 7.9% in all years.
However, the present turmoil should not hold back investors in their quest for investment in the share market. Thorough market study always reveals that each moment of volatility also promises ample opportunities for investment.
For instance, the temporary suspension of the medical device excise tax (in Dec 2015) albeit for two years should encourage investors to make the most out of the MedTech industry, even as the stock market reels under the pressure of a pessimistic wave. After all, as Warren Buffett says, “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
MedTech Tax Suspension: The Major Victims to Gain the Most
Over the last three years, all arguments have been exhausted as why the 2.3% MedTech tax was a failure in delivering the promised outcomes. The tax was projected to garner approximately $20 billion in revenues from 2013–19. But a 2014 report indicated that the IRS had only collected about 75% of the estimated total revenue expected to be generated by the tax. While as many as 15,000 filers had been projected, only 5,107 medical device tax forms were filed.
Although the Joint Committee on Taxation argued in favor of this tax, stating that revoking it will cost the economy $29 billion over a 10-year period, opposition against this tax has been rampant from the very beginning. Notably, this tax has taken a toll on small (often unprofitable) medical device manufacturers.
It has been seen, small device companies are often funded by venture capital. When unable to raise prices, find a suitable partner for merger or even produce profit at times, the 2.3% tax had affected critical operating funds. In such a scenario, the first response of such companies had been slashing jobs in a bid to save costs.
As per a report published in AdvaMed, this tax resulted in employment reductions of 14,000 industry workers in 2013 and the years prior to the implementation of the tax, with approximately an additional 4,500 jobs lost in 2014. Not much needs to be said about the adverse impact this may have already created on the U.S. economy as a whole.
Accordingly, as a much-needed breather for MedTech industry, with the tax finally being suspended for two years, stakeholders in the industry warmly welcomed this legislative move, particularly those with stakes in the small-cap medical device companies.
Time Is Ripe: Take Your Pick
Given this backdrop, we hereby select 5 small-cap MedTech stocks (< $1 billion) that have been performing well since the suspension of the medical device tax and are expected to retain its momentum in the days ahead.
The criteria of selection is our proprietary Zacks Rank scenario – stocks that carry a favorable Zacks Rank #1 (Strong Buy) or 2 (Buy) and have witnessed a price rise of more than 5% in the past 12 weeks. The stocks chosen by us also exhibit strong fundamentals that make them lucrative investing units over the near as well as the long term.
CryoLife Inc. (CRY - Free Report) : Georgia-based CryoLife engages in the processing and distribution of cryogenically preserved implantable human tissues, which are used for cardiac and vascular transplantations. This Zacks Rank #1 company currently holds a market cap of $356.74 million and has witnessed a 5.43% rise in its share price in the past 12 weeks.
While the company’s current earnings yield is 2.59%, far better than the industry average of -0.91%; its projected sales growth for the current year is 22.41% compared to the industry average of 8.27%. Over the long term, CryoLife’s expected EPS growth rate is pegged at 4%.
Orthofix International N.V. (OFIX - Free Report) : Orthofix is a Curacao-based medical device provider of reconstructive and regenerative orthopedic and spine solutions across the globe. This Zacks Rank #1 company currently holds a market cap of $759.03 million and has seen 5.63% surge in its share price in the past 12 weeks.
While the company’s cash flow per share is 2.02, compared to the industry average of 0.00; its projected EPS growth for the current year is 67.1% compared to the industry average of 10.1%. Over the long term, Orthofix’s expected EPS growth rate is 16.2%.
Anika Therapeutics Inc. (ANIK - Free Report) : Massachusetts-based Anika Therapeutics is a pioneer in developing hyaluronic acid (HA)-based therapeutic products for tissue protection, wound healing and repair. This Zacks Rank #1 company currently holds a market cap of $668.85 million and has witnessed an 18.61% gain in its share price over the past 12 weeks.
While its current earnings yield is 3.92%, far better than the industry average of -9.82%; its return on equity is 15.71% compared to the industry average of -21.6%. Over the long term, the company’s expected EPS growth rate is pegged at 15%.
Computer Programs & Systems Inc. (CPSI - Free Report) : Alabama-based, Computer Programs & Systems provides healthcare information technology solutions for rural and community hospitals in the U.S. This Zacks Rank #1 company currently holds a market cap of $726.85 million and has gained 11.78% on the bourse in the past 12 weeks.
While its current earnings yield is 6.32%, compared to the industry average of -3.45%; its projected EPS growth for current year is 113.7% as against the industry average of 11.7%. Over the long term, the company’s expected EPS growth rate is 14%.
Invitae Corporation (NVTA - Free Report) : California-based Invitae is a genetic information company, which provides genetic diagnostics for various hereditary disorders. This Zacks Rank #2 company currently holds a market cap of $283.82 million and has witnessed a massive 283.8% hike in its stock price in the past 12 weeks. While its projected sales growth is 334.15% as against the industry average of 19.09%; its projected EPS growth for the current year is 12.26% versus the industry average of 11.67%. Over the long term, the company’s expected EPS growth rate is pegged at 14%.
The Bottom Line
At the moment, the future of the MedTech industry looks bright, courtesy an expanding global population, rising popularity of digital healthcare services and the rapid development of technological know-how and its incorporation in the healthcare sector. Amid all these factors, we believe the medical device excise tax suspension makes for a key catalyst in this booming industry.
With global Medtech sales expected to grow at a CAGR of 4.1% to roughly $478 billion by 2020 (as per Evaluate Ltd.), we believe the aforementioned stocks can be promising additions to your healthcare portfolio, backed by positive momentum in share price and solid future earnings growth projections.
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