The recession alarm bells have been sounded. Many investors fear that we are heading towards a recession as a result of the inversion of the yield curve, a key recession indicator, as well as the ongoing trade war with China
According to CFO’s polled by Duke University, these fears are justified. Based on the survey, 53% of U.S. CFOs believe the market will enter into a recession by the 2020 elections. Two thirds predict a recession will come by year-end 2020.
“Business optimism has not been this low since September 2016, a time when the unemployment rate was 5%. Optimism is low in all regions of the world, which exacerbates any slowdown occurring in the US,” John Graham, a finance professor at Duke University who directed the study, stated.
That being said, large-cap med tech stocks have outperformed the S&P 500 year-to-date while small and mid-cap stocks have surpassed the Russell 2000 over the same time period. With this in mind, Needham’s Michael Matson stated on September 24 that he believes 3 med tech stocks have earned a “Strong Buy” rating despite the rising recession risk. This is a rating Needham gives to stocks that have especially strong long-term growth narratives.
Using data from TipRanks, we wanted to dig a little deeper to determine if the five-star analyst’s picks really are poised to outperform.
Let’s dive in.
Boston Scientific Corporation
The med tech company manufactures medical devices such as defibrillators and pacemakers to provide patients with less invasive medical solutions. However, Matson does point out that one of BSX’s strengths is its structural heart products which could fuel significant sales for the company.
Back in April, BSX received FDA approval for its LOTUS Edge Aortic Valve System that uses transcatheter aortic valve replacement (TAVR) technology to treat severe aortic stenosis, or the narrowing of the aortic valve opening. Adding to the good news, its WATCHMAN left atrial appendage closure device reached 100,000 patient implants globally as of September 18.
The company has also made significant progress in terms of its efforts to expand its interventional oncology, arterial and venous therapy product offerings. BSX completed its $4.2 billion acquisition of BTG plc on August 26 in order to expand its reach in these areas.
“Over the longer-term, we think that the BTG deal has the potential to be accretive to BSX’s revenue growth and margins,” Matson commented. He adds that its limited capital equipment sales exposure makes it less vulnerable in a recession. As a result, the five-star analyst rated BSX a “Strong Buy” and maintained the $53 price target. He believes share prices could surge 26% over the next twelve months, which is the highest upside predicted out of all other analysts covering the stock.
All in all, Wall Street echoes the analyst’s sentiment. 15 Buy ratings vs 2 Holds assigned in the last three months add up to a ‘Strong Buy’ analyst consensus. Its $49 average price target indicates 15% upside potential.
Zimmer Biomet Holdings
Zimmer Biomet (ZBH- Get Report) develops medical technologies to treat patients suffering from bone, joint and supporting soft tissue injuries or disorders. Similar to BSX, Matson highlights ZBH as one of his top med tech picks in spite of its recent dip as less of its sales come from capital equipment.
The company, which is up 32% year-to-date, has attracted a lot of attention thanks to its new robotics system. Back in March, ZBH announced that it received FDA 501(k) clearance for its Rosa One Spine system for robotically-assisted surgery. Rosa helps surgeons perform thoracolumbar minimally invasive and complex spine procedures.
Partly due to the limited launch of Rosa, ZBH saw its knee segment best growth in three years, with the company planning to increase its investments in its robotics segment in the second half of the year.
“Importantly, even when excluding ROSA sales in the quarter, our global knee business delivered positive growth, accelerated growth sequentially and further narrowed our gap to market,” CEO Bryan Hanson noted.
While Zimmer has been bogged down by quality and supply issues, it has made progress in resolving them. Supply chain improvements that are expected to run through the inventory channel and additional product launches could drive significant upside for the company.
On September 16, Zimmer announced that it received FDA 501(k) clearance for the JuggerStitch meniscal repair device. Just a few days later, it reached a distribution agreement with Align Technology (ALGN) for its dental scanners. Based on all of the above factors, Matson picks ZBH as his second “Strong Buy” and maintained his $170 average price target. His price target is highest out of all the analysts covering ZBH and suggests 24% upside potential.
The rest of the Street is on the same page. With 14 Buy ratings compared to 2 Holds and 1 Sell received in the last three months, ZBH has a ‘Strong Buy’ analyst consensus. The average price target of $152 implies 10% upside potential.
MDT is the largest medical device company in the world and creates medical solutions for cardiac disorders, diabetes, minimally invasive therapies and restorative therapies. In an attempt to keep up with competitors, MDT unveiled its Hugo robot-assisted surgery system on September 24. Management believes the system, which is expected to be launched outside of the U.S. next year, is more flexible and cost-effective than other technologies on the market.
While some believe the financial projections for Hugo leave something to be desired, several analysts disagree. As the surgical robotics market is largely underpenetrated at about 2%, the space represents a significant opportunity for MDT.
Additionally, it announced on September 23 that its Evolut Pro+ TAVR device has been approved by the FDA for use in patients at low risk from open valve replacement surgery. Evolut is an updated version of its valve product.
All of these positive developments prompted Matson to pick MDT and maintain the $133 price target, the highest out of all the Wall Street analysts that have assigned a rating to the stock. His price target conveys his confidence in MDT’s ability to climb 24% over the next twelve months.
In general, Wall Street takes a similar approach when it comes to MDT. It has a ‘Strong Buy’ analyst consensus as it has received 16 Buy ratings vs 5 Holds in the last three months. Shares could rise 9% in the next twelve months based on its $117 average price target.