With all the market volatility at the end of 2018 the big question on the minds of investors is whether or not right now is a buying opportunity.
I won’t try to convince you one way or the other.
But if you’re interested in high-growth, small-cap medical device stocks I will give you a few names that should pique your interest. You can decide for yourself if it’s worth taking a position in these stocks right now!
Small-Cap Medical Device Stock #1: Inogen (INGN)
First on my list is an old favorite, Inogen (INGN).
Inogen used to have a market cap of $6 billion. But that was last summer, when the market was going gangbusters. The stock looked like a deal after retreating 30% this past fall. Now, it’s been cut in half and has a market cap of just over $3 billion.
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The company makes portable oxygen concentrators (POC) for patients with chronic respiratory conditions. It’s a straightforward pitch. A few years ago patients that needed oxygen had to lug around big tanks or stay at home. Now, they can use one of Inogen’s products, some of which are small enough to fit in a small bag.
The company is a formidable contender in the POC market, and holds a roughly 50% market share in the U.S. New product releases like Inogen Connect, a consumer-oriented app that gives details like oxygen purity and device support notifications, should help it keep that trend alive.
Beyond the U.S., Inogen is focused on growing in two big markets represented by China and India. I know people aren’t excited about China right now but considering that there’s potential for trade relations to improve and that China has a lot of poor-quality air, smokers and no reimbursement, it’s not hard to see Inogen selling a lot of portable oxygen tanks there in the future.
In recent months the stock has suffered in part because the near-term opportunity in China looks fuzzy, but also because there’s some debate on whether the U.S. market in 2019 can reach 4 million patients, or a number that’s far less (smoking trends here are going down).
The company is a consistent grower, and it’s profitable. In 2016 and 2017 revenue was up by 28% and 23%, respectively. In 2018, analysts are looking for 40% growth. In 2019, they see 26% growth, but management guidance (23% to 26% growth) is traditionally quite conservative.
On the bottom line Inogen is seen delivering EPS of $2.11 in 2018 (up 61%) and $2.16 in 2019 (up a measly 2%). It’s never really been a cheap stock given the growth and profitability, but today this small-cap medical device stock is trading with an enterprise-value-to-forward revenue (EV/Forward Revenue) multiple of just 5.8. That’s as cheap as it’s been since early 2017, and well below peak valuation of 16.
A stock in a downtrend that’s cheap relative to history isn’t a compelling reason to buy. But I think the storyline here, the growth and the market potential is. Inogen is also one of JP Morgan’s top small-cap picks for 2019.
Small-Cap Medical Device Stock #2: ViewRay (VRAY)
ViewRay is a $662 million market cap company that makes MRI-guided radiation therapy systems that are used for imaging and treating cancer patients. Its MRIdian solution integrates MRI technology, radiation delivery and proprietary software to simultaneously image and treat cancer patients.
The technology is most interesting because, as compared to traditional radiation therapy systems known as linear accelerators (linacs), MRIdian appears better at targeting tumors while avoiding healthy tissue and can personalize treatment depending on a patient’s particular anatomy and tumor location/size.
According to Morgan Stanley the gen 2 MRIdian’s approval in the U.S., Japan and Europe means the solution is competing against an estimated 12,000 linacs and annual purchase volume of roughly 900. units. There is competition out there, mainly from Elekta, MRIdian has a high price point and adoption from its most likely customers (large academic centers and community centers) is still unknown given ViewRay is relatively early in the MRIdian launch, so the stock is not without risks.
However, if you’re still reading I suspect you’re not a risk-averse investor! And at the current price/valuation one can make the case that ViewRay’s risk vs. reward profile is quite attractive.
Analysts had expected the company to generate $80 million in revenue in 2018, which would mark at 135% improvement over $34 million. Management pre-released earnings (due out in mid-March) and said revenue should come in at $81 million, a hair better than expected.
It sold three units in the quarter, plus one system upgrade, and received eight new orders (equal to around $49 million) in Q4. Backlog at year end was $212 million.
That all sets the company up well for meeting or exceeding expectations for 50% revenue growth, to $120 million, in 2019. Clearly the top-line growth is attractive, but ViewRay did file for a $250 million mixed shelf offering, so some dilution in the near term is possible, even though the company currently has $201 million in cash.
Also, ViewRay is challenged on the bottom line, and will remain so until it has a large enough installed base. Analysts see an EPS loss of -$1.06 in 2018 and -$0.76 in 2019, with potential first profits not until 2022.
Radiation oncology isn’t an easy business to break into so I wouldn’t go in huge with a ViewRay position. And keep in the back of your mind the potential for slow adoption of MRIdian and an eventual sale of the company, if things don’t work out. On the flip side, rapid adoption could easily mean ViewRay becomes a formidable contender in its market, and that would likely translate into a share price far above where it is now.
Small-Cap Medical Device Stock #3: AxoGen (AXGN)
AxoGen is a $641 million market cap company that makes implantable surgical products for peripheral nerve injuries. The complex structure of these implants supports nerve cell regeneration in the patient’s body. They are all off-the-shelf products, meaning they can be purchased, stored, and made available for use at a moment’s notice.
Full disclosure: This is a stock we used to hold in the Cabot Small-Cap Confidential portfolio and we did very well on it. We began reducing our exposure as the stock drifted lower, and are now totally out of it but watching for possible inclusion in the future.
Shares are still near 52-week lows so this isn’t one I’m suggesting you buy now. It’s more of a “wait and see” stock since I think the overall story is interesting and there will come a point at which the stock should stabilize, provided management is able to overcome some of the internal challenges.
The backstory is that AxoGen was a 40% grower, and had guided to keep that streak going in 2018 and 2019, but ran into some issues with its sales force in the middle of 2018. That led to growth that was slower than expected, but still in the upper 30% range. It isn’t exactly a slow-growth story, but confidence has been dented and nefarious actors have jumped on the “down with AxoGen” bandwagon.
However, AxoGen is retooling its sales strategy and bringing in some new leadership, so a shakeup here could be good long term. And if over the next six months the company looks poised to deliver 2019 revenue growth at or above guidance of 35%, and gross margins above 80%, along with some supplemental data points to help convince the market that the company is back on track, the stock could go on one heck of a run.
The Best Small-Cap Medical Device Stocks for 2019
These three stocks are a good place to start looking for small-cap medical device stocks that could outperform in 2019. They all carry their own risks, and if I had to choose just one I’d say Inogen represents the best buy of the group.
ViewRay is compelling for a small position, and AxoGen is a watch list stock until it stops going down and the fundamental growth story firms up.
I also cover a number of high potential small-cap medical device stocks in Cabot Small-Cap Confidential, including one that was just recommended last month.
The stocks in that portfolio are my highest conviction small-cap medical device stocks for the year ahead. They play in attractive markets, including drug manufacturing equipment and supplies, and organ transplant monitoring.
If you’d like to get reports on these stocks, plus more, just grab a subscription to Cabot Small-Cap Confidential now.
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
*This post has been updated from an original version.