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A Great Buying Opportunity for This Healthcare Stock (ALGN)

Andy Crowder

The healthcare market is one of the strongest areas in the American economy. U.S. healthcare system costs have doubled over the past ten years. And I think they will double again in another 10 years.

And we know why it's increasing: the great population boom of the post WW2 era is now resulting in a retirement boom. But it's also a hip replacement boom. And a cardiac surgery boom.

But it's a healthcare boom as much as anything else. Some folks might decry this situation and point to rising health care spending in a debt laden country as proof that the sky is falling or the end of America is coming.

And you might hear from the mainstream media that this boom will bankrupt our country - it's the whole 'entitlement spending must be reigned in' argument. This might be the case, some day.

But for the foreseeable future it is more likely that health care spending is sustainable and that related investments are a secure and stable place to park cash, while generating healthy long-term capital gains.

Today, I'm going to present to you with a healthcare stock that is in the sweet spot of industry growth and opportunity.

If you buy this stock today, you're hitching your wagon to one of the few remaining growth areas in the American economy. It's a trend that shows no signs of slowing. Regardless of what President Obama does, or what the next President signs into law, healthcare costs are likely to continue growing.

One very specialized sector of health care is particularly attractive.

According to the American Association of Orthodontists almost 80 percent of all American teenagers and 1 million adults wear braces at any given time. Straight teeth with a big beautiful smile is as "American" as it gets. But, thankfully, a lot has changed in the last 120 years since the specialty of orthodontics was founded in the 1890s.

In the past, correcting teeth required wearing metal braces and rubber bands. I think I feared getting braces more than cavities during dentist appointments growing up.

Braces were uncomfortable and embarrassing. They were decidedly not cool.

This was the case for both teenagers and for adults. Adults who wanted to correct their teeth and had no other alternative to wearing uncomfortable and unsightly metal braces.

Fortunately for the image conscious - which is just about every one of us - fifteen years ago a company by the name of Align Technology (Nasdaq:ALGN - News) came up with a product appropriately named 'Invisalign'.

Now with a $1.5 million market capitalization, the Santa Clara, California medical device company is thriving. Align's main product, Invisalign, caters to the teen and adult markets alike. And its broad market has resulted in stable revenue growth over the years.

In fact, Align has managed to grow sales every year since 2006 and even managed a 3 percent growth rate during the worst of the Great Recession.

Total revenue rose an impressive 16.4 percent to $104.9 million in the first quarter thanks to an increasing patient population. But the numbers of new patients this year should pale in comparison when Align brings Invisalign to mainland China.

"This is a significant milestone and we are very excited about the opportunity and growth potential for Invisalign in China," said Richard Twomey, Align's vice president of international, in a press release.

"With rising income levels, increased spending on discretionary items such as high-end luxury goods, and heightened focus on health and aesthetics, China is poised to be one of the fastest-growing markets for orthodontics in the foreseeable future."

Over the past decade, the Chinese orthodontic market has grown steadily as the importance of dental health and personal appearance has increased among the general population of 1.4 billion. Today, China is estimated to have nearly half a million new orthodontic case starts each year, with a higher percentage of complex class II and III malocclusion cases than in Western countries.

Most orthodontic treatment is done within government-owned hospitals in major metropolitan cities; however, rising consumer demand has led to accelerated growth of private dental clinics, according to Align. China represents a huge growth opportunity for Align, but the stock does not have the huge risk carried by many Chinese companies.

"With over 1.3 million patients treated worldwide, Invisalign is a cutting-edge treatment technology that has been used by many doctors to treat a very broad range of malocclusion," said Yanheng Zhou, chair of the orthodontics department at Peking University School of Stomatology. "The time is right for Invisalign in mainland China."

Analysts agree with Yanheng Zhou, and have upwardly revised earnings estimates for Align. Financial results for 2011 are expected to show a 20% growth in sales to $455 million and an EPS of $0.80. Next year, EPS is expected to grow 25% to $1.01 with total sales of $514 million.

But Align is notorious for exceeding expectations and I suspect they will again. At 20 times forward EPS, shares seem fairly priced. But the company has shown the ability to expand during recessions and the long-term impact from China will provide a massive benefit to Align's business.

Both factors indicate an upbeat future, no matter what the economy does, and should provide a tailwind for the stock this year. Additionally, the healthcare sector, which has underperformed against the market over the past two years, appears ready to regain lost ground.

Shares are a fantastic buy below $20 and I expect them to rise to $30 over the next year. Investors looking for an easy way to straighten their portfolio need look no further than Align.