NEW YORK (TheStreet) -- With the Supreme Court set to decide the fate of Affordable Health Care Act in June 2015, we decided to look at the medical devices industry, which has been an above-trend growing sector generating substantial exports for the economy.
As a sector, it has been growing at 5% per year from 1997 to 2013, compared to 4% for the rest of the economy. The largest component, surgical appliance and supplies manufacturing, grew at 6%, and ophthalmic goods manufacturing grew at 8% per year in the same period. Moreover, the sector is considered recession-proof, as customers don't tend to buy fewer medical supplies during economic downturns.
So what are the best health care equipment companies investors should be buying? Here are the top three, according to TheStreet Ratings, TheStreet's proprietary ratings tool.
TheStreet Ratings projects a stock's total return potential over a 12-month period including both price appreciation and dividends. Based on 32 major data points, TheStreet Ratings uses a quantitative approach to rating over 4,300 stocks to predict return potential for the next year. The model is both objective, using elements such as volatility of past operating revenues, financial strength, and company cash flows, and subjective, including expected equities market returns, future interest rates, implied industry outlook and forecasted company earnings.
Buying an S&P 500 stock that TheStreet Ratings rated a buy yielded a 16.56% return in 2014 beating the S&P 500 Total Return Index by 304 basis points. Buying a Russell 2000 stock that TheStreet Ratings rated a buy yielded a 9.5% return in 2014, beating the Russell 2000 index, including dividends reinvested, by 460 basis points last year.
Check out which health care equipment companies made the list. And when you're done, be sure to read about which biotech companies to buy now. Year-to-date returns are based on May 22, 2015, closing prices. The highest-rated stock appears last.STJ data by YCharts
3. St. Jude Medical, Inc. (STJ)
Market Cap: $21 billion
Year-to-date return: 14.2%
St. Jude Medical, Inc., together with its subsidiaries, develops, manufactures and distributes cardiovascular medical devices for cardiac rhythm management, cardiovascular, and atrial fibrillation therapy areas worldwide.
"We rate ST JUDE MEDICAL INC (STJ) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its solid stock price performance, growth in earnings per share, notable return on equity, reasonable valuation levels and largely solid financial position with reasonable debt levels by most measures. We feel its strengths outweigh the fact that the company shows weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
- ST JUDE MEDICAL INC has improved earnings per share by 5.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, ST JUDE MEDICAL INC increased its bottom line by earning $3.45 versus $2.50 in the prior year. This year, the market expects an improvement in earnings ($3.95 versus $3.45).
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. When compared to other companies in the Health Care Equipment & Supplies industry and the overall market, ST JUDE MEDICAL INC's return on equity exceeds that of the industry average and significantly exceeds that of the S&P 500.
- The debt-to-equity ratio is somewhat low, currently at 0.91, and is less than that of the industry average, implying that there has been a relatively successful effort in the management of debt levels. Despite the fact that STJ's debt-to-equity ratio is low, the quick ratio, which is currently 0.69, displays a potential problem in covering short-term cash needs.
- You can view the full analysis from the report here: STJ Ratings Report