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3 Top Medical Device Stocks to Buy Now

Brian Feroldi, The Motley Fool

Healthcare providers tend to stay brand-loyal to medical devices after they've been trained on how to use them. This product stickiness is a key reason the industry is a great place to hunt for investment ideas.

Align Technology (NASDAQ: ALGN), NovoCure (NASDAQ: NVCR), and DexCom (NASDAQ: DXCM) are three great examples of medical device makers that have already produced huge returns for shareholders. Here's why each of them is a great buy today.

Dollar signs growing on chalk board

Image source: Getty Images.

Align Technology

Align is the company behind the Invisalign system. The company sells a series of clear aligners to patients with misaligned teeth, which is an attractive alternative to metal-and-wire braces.

Beyond selling directly to consumers, Align also sells an intra-oral scanner called iTero to orthodontists that produces 3D images of patients' teeth. Those images make it easy for dental practices to get their patients started on Invisalign.

Align's products have proven to be a massive hit with patients and dental professionals alike. The company's revenue, profits, and stock price have all soared in response. The great news for investors is that Align's management team believes that it has still only captured about 13% of its current addressable market. If that number is anywhere close to accurate, then it means that this company's days of hypergrowth are far from over.

Meanwhile, the company's stock is currently down by more than 40% from its recent high. The huge reversal can be blamed on fears of rising competition from SmileDirectClub and a slower-than-hoped-for growth forecast

Should investors worry about the incoming competition? I don't think so, for a few reasons. First, the two companies are targeting different types of customers: people who visit the orthodontist and those who do not. Second, Align is a direct investor in SmileDirectClub and is an exclusive supplier, meaning buying Align gives investors exposure to growth of SmileDirectClub. And third, the market opportunity is so large that I think these two businesses can coexist.

Wall Street appears to agree with my assessment. Current projections call for Align's profits to grow in excess of 24% annually over the next five years. With shares currently trading around 38 times next year's earnings estimates, I think right now is a great time for investors to get in.

NovoCure

Researchers have been looking for new ways to fight cancer for decades. While most of that effort has been focused on developing better drugs, an innovative company called NovoCure took a different approach.

The company discovered that highly-tuned electric fields could be used to inhibit cell division in cancerous tumors, meaning it slows down the speed at which the tumor grows. When this technology is combined with traditional treatment methods, it leads to better outcomes. What's more, using electric fields to fight cancer is virtually free of side effects -- a highly appealing prospect for patients and providers alike.

NovoCure decided to focus its initial efforts on treating a deadly form of brain cancer called glioblastoma multiforme. The company secured its first Food and Drug Administration (FDA) approval in 2011, and sales have grown like gangbusters ever since.

For investors, the exciting thing about NovoCure is that the company believes that its technology can fight a wide range of other cancers. It is awaiting FDA approval to treat mesothelioma and is in various stages of development in treating lung cancer, ovarian cancer, pancreatic cancer, and others. Expansion into any of these indications down the road could allow its hypergrowth to continue.  

NovoCure hasn't reached profitability yet, but it is very close. The company has more than $220 million in cash, so it shouldn't need to tap investors to get there. 

While NovoCure is packed with potential, the recent marketwide sell-off has hit its stock hard. Shares are currently down more than 30% from their all-time high. You still can't call the share price "cheap" (it's currently about 14 times sales), but the potential upside is massive if NovoCure can successfully win FDA approval in new indications. I think the odds of that happening are very good since its device has already proven effective in brain cancer and is virtually free of side effects. I also love the fact that this company has no competition

DexCom

The market for diabetes products is massive and grows every year. While that's a terrible trend for the health of society, it is a great backdrop for diabetes companies like DexCom. 

DexCom makes a continuous glucose monitor (CGM) that enables people with diabetes to track changes in their blood glucose levels in real time. That's important because diabetes can cause a person's blood glucose levels to fluctuate wildly throughout the day. If levels are too high or too low, it can cause short- and long-term health problems. Being able to monitor changing glucose levels in real time allows patients to take action to avoid issues down the road. 

The allure of DexCom's solution has translated into mind-boggling growth. Sales have grown from $259 million in 2014 to an estimated $976 million in 2018. The huge gains are allowing the company to finally start producing profits. 

DexCom has numerous partnerships that should drive its next phase of growth. The company is working to integrate its technology with insulin pumps made by both Tandem Diabetes Care and Insulet. It is also working with Alphabet's healthcare arm to develop next-generation CGM technology. When you combine these opportunities with the fact that CGM penetration rates are still very low, DexCom looks poised for massive growth. 

Market watchers currently project that its earnings will grow in excess of 140% annually over the next five years. While the triple-digit growth projection is mostly a result of starting from a small base, that's still an eye-popping number. If the company can deliver on those lofty expectations, then its sky-high P/E ratio, which is currently 257, will fall very quickly. That makes me believe that investors who buy today will be handsomely rewarded for paying up to own this stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Brian Feroldi owns shares of Alphabet (A shares), Alphabet (C shares), and NovoCure. The Motley Fool owns shares of and recommends Align Technology, Alphabet (A shares), and Alphabet (C shares). The Motley Fool recommends Insulet. The Motley Fool has a disclosure policy.