MedTech Stocks: Stable, Yet Defensive Growth
Medical technology, or MedTech, stocks, have long been a favorite for growth investors due to the attractive qualities of gradual, long-term growth in a relatively defensive industry. Throw in M&A potential and it’s not hard to see why this group of stocks tends to outperform the broad market.
We saw another solid year of performance from the MedTech sector in 2018 as it outperformed the S&P 500 index by 17%. Many of the same big picture trends that helped the entire group last year remain intact today, and should be particularly beneficial for small cap MedTech stocks in the year ahead.
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One quick side note: MedTech refers to any technology used in a care setting, and/or devices with which a patient can be diagnosed or treated. This includes devices, implants, diagnostics, disposables, drug delivery systems, drug manufacturing equipment, biomaterials, data processing software, connected health IT, and so on.
Big Picture Trends Powering MedTech Stocks
What are a few of the trends supporting growth for medical technology stocks?
It starts with good fundamentals in mature markets (including the U.S.), opportunities in emerging markets, and growth contribution from new products and applications.
MedTech stocks also tend to be relatively defensive, with durable growth and risk profiles that are relatively low, especially as compared to biotech stocks.
This attractive risk versus reward profile comes about because innovation and product development are usually more incremental than disruptive with medical technologies. That means the value of a stock isn’t likely to completely change overnight, as is often the case with a young biotech stock that has just had a treatment either approved or denied by the FDA.
The timeline to releasing products to the market is often shorter with MedTech stocks as well. The flip side is that MedTech companies tend to have slower revenue growth (as compared to biotech stocks) since the product ramp is more gradual. But that’s a decent tradeoff for considerably lower risk, in my mind.
There are also compelling secular trends within healthcare that we can play with pure-play small caps.
Consumerism is an emerging theme, as end beneficiaries of MedTech like you and me become more involved in decisions related to our health and that of our loved ones. We increasingly have control of how our families spend their healthcare dollars. That’s a good thing given healthcare costs continue to rise as a percentage of household spending.
Companies like Teladoc (TDOC), which offers a range of telehealth services, and Biotelemetry (BEAT) and Apple (AAPL), which are running the Apple Heart Study to identify irregular heart rhythms with the help of the Apple Watch, are just two examples of consumerism in the healthcare market.
There is also a trend toward at-home care. This is intended to make life more convenient for patients and also to lower costs that can ramp quickly for those with chronic conditions, or that require frequent treatment. Biotelemetry also plays into this trend as the company’s cardiac monitoring solutions (as well as blood glucose monitors) can be worn at home. Another company in the same space is iRhythm (IRTC).
Then there is Tactile Medical (TCMD), which makes compression technologies to treat lymphedema. And Inogen (INGN), which makes and sells lightweight portable oxygen concentrators. Both offer at-home care solutions for patients.
There is also a massive trend in personalized healthcare. The approach, which builds on huge advances in gene research, data analytics and customized prevention, diagnosis, treatment and drug dosing programs, specifically tailored to a person’s unique biochemical makeup, are completely changing the future of healthcare.
There are numerous small cap biotech stocks developing compounds that fall into this bucket. There are also companies like NanoString (NSTG), which makes tools for translational research and diagnostics, with a particular focus on diagnostic tools for cancer.
The Best MedTech Stocks
As the healthcare industry moves away from a one-size-fits-all approach for certain diseases and conditions, in part through the efforts of small, innovative companies, investors are presented with many attractive opportunities to buy shares in the small cap “building blocks” of a better healthcare system.
That’s not to say every small-cap MedTech stock is a screaming buy. Obviously not. You need to do your research and try and filter out the gold nuggets from the specks of dirt.
But generally speaking, if you stick with quality names, MedTech can offer investors an incredibly attractive mix of growth and stability that would be a welcome addition to just about any portfolio. And if you’re interested in small- and mid-cap stocks, the opportunities are even more attractive.
To learn more about the MedTech stock research here at Cabot, click here.
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