6 Medical Device Stocks to Buy If Ted Cruz Is Elected President

Investors considering the potential economic consequences of a Ted Cruz presidency need to be laser-focused on his plans to end Obamacare. One specific stock sector subset will be lucrative.
By Ross Kenneth Urken ,

Investors considering the potential economic consequences of a Ted Cruz presidency need to be laser-focused on his plans to end Obamacare.

With the caveat that a Cruz presidency is an extreme dark horse possibility at this point, here’s a glance into the theoretical abyss.

Because the Affordable Care Act imposes an excise tax of 2.3% on medical device revenue to cover the expanded Medicaid coverage, eliminating Obamacare would give a boost to medical device manufacturers like Medtronic (MDT) - Get Report . After all, the bill was scored at $24.4 billion over ten years -- meaning med tech companies who don't have to pay this additional tax would keep that cash. Medtronic and its ilk would have more capital for research and development and growth.

In fact, in June when the House planned to vote on the Protect Medical Innovation Act, a bill that specifically called for the repeal of the medical device excise tax, Mike Matson, Needham & Company senior research analyst for medical technologies and diagnostics, calculated the elimination of the tax would increase earnings per share most at medical technology companies CONMED Corp. (CNMD) - Get Report (7%) and NuVasive, Inc. (NUVA) - Get Report (6%).

“From a stock perspective, we believe that a repeal of the medical device excise tax would benefit profitable med tech companies that are being valued on earnings multiples,” Matson wrote. Large-caps, he said, would see a one-time 4% average boost in their earnings, with small caps getting a larger surge.

The sector, according to Needham estimates, has an average earnings-per-share (EPS) growth of 12% for 2015, robust performance as is. The drop of the excise task would just be icing on the cake by adding additional growth. Included in Matson's list are St. Jude Medical (STJ) , which would see 4% EPS growth increase with the excise tax eliminated; Stryker (SYK) - Get Report , which would see 4% EPS growth increase; Medtronic, which would see 3% EPS growth increase; and Zimmer (ZBH) - Get Report , which would see 2% growth increase.

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Not everyone’s a raging bull on this potential legislative pivot that a Cruz presidency would promote; eliminating the medical device tax would be only a slight boost for these stocks according to skeptic Josh Jennings, a Cowan and Company managing director covering health care equity research in medical technology.

“It would be an incremental positive for the entire group of large cap medical device manufacturers who have significant U.S. product sales,” he said. “I don’t view any one large cap multi-national company benefiting more so than peers, and I see a repeal as an incremental positive for the space and not necessarily stock moving."

That's the big X-factor -- whether the excise tax repeal, stemming from Cruz's elimination of Obamacare, would be allocated in a way to boost the stock.  

"It isn’t clear that the financial benefit of a reversal of the 2.3% medical device tax on U.S. sales would flow through to the bottom line, as my guess would be that that at least a healthy portion of the tax savings would be reinvested in the business,” Jennings said. “Overall, a repeal of the medical device tax incorporated into the ACA would have a limited impact to the future financial performance of the group.”

Though there is doubt cast on whether investing in medical device manufacturers would really deliver healthy profits to your portfolio in this hypothetical scenario, putting some skin in the game in this sector would at least be an option that only has upside. The extra money saved from the repeal of the excise tax may not move the stock price of these companies, but there is a logical argument to be made for additional growth in a sector that is already humming.  Indeed, large-cap med tech stocks are trading at a next 12 month price-to-earnings ratio of 19.7, and small-caps in this sector are trading at a next 12 month enterprise-value-to-sales ratio of 5.2. What's more, health care stocks have outperformed the market, with the S&P 500 Healthcare Index up 3.83% year-to-date compared to the S&P 500, which is up a meager 0.96% year to date.

Eliminating Obamacare may add $137 billion to the federal budget over the next ten years and increase the number of uninsured Americans by 24 million, according to the Congressional Budget Office, but your portfolio will at least be faring well.  

Cruz Control would have sweeping ramifications on the nation's economy, with his goal to balance the budget, implement a flat tax and eradicate the Export-Import Bank (which would pose negatives to industrials like Boeing, Dow Chemical and GE), but stock-pickers looking to invest need to focus on the health care names most affected by an Obamacare obliteration.

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