By Philip van Doorn, MarketWatch
Last year was ultimately pretty dull for the stock market, as the benchmark S&P 500 Index ended little changed despite increased volatility.
Health care, however, outperformed the broader market and all but one other sector: consumer discretionary.
That means shares of manufacturers of medical supplies and devices appear fully valued at the start of 2016, but there are still a number of good growth opportunities, according to Jefferies Group analyst Raj Denhoy.
Here’s how the 10 sectors of the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.82% performed during 2015 (with dividends reinvested), along with average annual total returns for longer periods:
|S&P 500 sector||Total return - 2015||Average annual return - 3 years||Average annual return - 5 years||Average annual return - 10 years|
The health-care sector ranked second in 2015 and generated outsized average annual returns of 30% over three and five years. The sector has been a sure bet for investors for many years, but there are signs that amazing profit growth among companies is slowing.
Digging further, the S&P 500 health-care equipment and services subsector performed well, with a total return of 7.5% in 2015 (with dividends reinvested). The more narrowly focused iShares U.S. Medical Devices ETF /zigman2/quotes/203771886/composite IHI -0.02% returned 9.7%, according to FactSet.
In a report Monday, Denhoy said large-cap medical supply and device companies as a group should post “moderate” organic sales growth this year after rising “a touch below” 5% in 2015 and 3.9% in 2014. Still, growth ought to remain 4% to 5% “for the foreseeable future,” he said.
Those may not seem like exciting growth numbers, but consider that the economy is expected by analysts to grow at about half that pace.
To be sure, Denhoy said the group has a relatively high valuation that will likely limit gains compared with the previous few years.
Jefferies supplied a list of 11 buy-rated manufacturers of medical supplies and devices (not limited to large-cap companies), with the most upside for 2016.
“Our top picks show a preference for stories where new technologies are supporting higher growth; where a well-supported turnaround is underway; where valuations inappropriately lag the group; or where the benefits from acquisition or consolidation are clear,” Denhoy said.
The list isn’t ranked by upside potential, based on Jefferies’ price targets, but rather on how strongly Denhoy and his team of analysts feel about the stock:
|Company||Ticker||Closing price - Dec. 31||Jefferies’ price target||Implied 12-month upside potential|
|Medtronic PLC||/zigman2/quotes/206816578/composite MDT||$76.92||$88.00||14%|
|Wright Medical Group NV||$24.18||$29.00||20%|
|Edwards Lifesciences Corp.||/zigman2/quotes/205745196/composite EW||$78.98||$100.00||27%|
|Hologic Inc.||/zigman2/quotes/201671131/composite HOLX||$38.69||$48.00||24%|
|Abiomed Inc.||/zigman2/quotes/202106417/composite ABMD||$90.28||$125.00||38%|
|Integra LifeSciences Holdings Corp.||/zigman2/quotes/200866868/composite IART||$67.78||$78.00||15%|
|NuVasive Inc.||/zigman2/quotes/202351502/composite NUVA||$54.11||$63.00||16%|
|NxStage Medical Inc.||$21.91||$24.00||10%|
|MediWound Ltd.||/zigman2/quotes/203756555/composite MDWD||$8.54||$13.00||52%|
|Zimmer Biomet Holdings Inc.||/zigman2/quotes/205473073/composite ZBH||$102.59||$125.00||22%|
|Sources: Jefferies Group, FactSet|
Among large-cap manufacturers of medical supplies and devices, Denhoy favors Medtronic PLC /zigman2/quotes/206816578/composite MDT +0.24% “as the company remains in one of the strongest product cycles in recent memory and the cost savings, access to cash and strategic underpinnings from the [Covidien PLC] acquisition support a better earnings and valuation framework.”
Among small-cap names, the favorite among Denhoy’s team is Wright Medical Group NV . This is based on increasing confidence that the company is successfully integrating Tornier NV, which it acquired in October, “with the story shifting back to one of high-teens revenue growth,” according to Denhoy.
What other analysts are saying
We thought it would be interesting to look beyond the opinions of one team of analysts. Here’s a roundup of sentiment for the group:
|Company||Ticker||Closing price - Dec. 31||Consensus price target||Implied 12-month upside potential||Number of analysts polled by FactSet||Share of ‘buy’ ratings among analysts|
|Medtronic PLC||/zigman2/quotes/206816578/composite MDT||$76.92||$86.75||13%||26||77%|
|Wright Medical Group NV||$24.18||$27.92||15%||17||71%|
|Edwards Lifesciences Corp.||/zigman2/quotes/205745196/composite EW||$78.98||$88.55||12%||24||71%|
|Hologic Inc.||/zigman2/quotes/201671131/composite HOLX||$38.69||$43.06||11%||22||50%|
|Abiomed Inc.||/zigman2/quotes/202106417/composite ABMD||$90.28||$97.90||8%||11||73%|
|Integra LifeSciences Holdings Corp.||/zigman2/quotes/200866868/composite IART||$67.78||$72.36||7%||16||56%|
|NuVasive Inc.||/zigman2/quotes/202351502/composite NUVA||$54.11||$59.88||11%||21||67%|
|NxStage Medical Inc.||$21.91||$24.88||14%||10||80%|
|MediWound Ltd.||/zigman2/quotes/203756555/composite MDWD||$8.54||$13.33||56%||3||100%|
|Zimmer Biomet Holdings Inc.||/zigman2/quotes/205473073/composite ZBH||$102.59||$121.46||18%||29||72%|
|Sources: Jefferies Group, FactSet|
Sentiment for the group is strong. As always, your next step, if you find those companies interesting, is to learn more about their product lines and expansion efforts, and consider how successful the company will be over the next several years.