Can medical technology stocks continue their upwards momentum in the second half of the year? Investors say yes. But technical analysis says not necessarily.
In the first six months of 2016, the health care sub-sector has outperformed the S&P 500 by 10.2% and outperformed the S&P Healthcare Index by 13.4%, according to JPMorgan analysts.
The analysts conducted a survey of more than 70 buy-side investors (both generalists and health-care-oriented investors) to gauge expectations for the quarter and the rest of the year. The survey found that 68% called for the sector to outperform the S&P in the second half of the year. As well, 61% expect medtech stocks to outperform in the second half of the year vs. the rest of health care sector, the note said.
Abbott Laboratories (ABT - Get Report) (garnering 23% of votes), Boston Scientific (BSX - Get Report) (20%), Edwards Lifesciences (EW - Get Report) (17%), Zimmer Biomet (ZBH - Get Report) (15%) and Medtronic (MDT - Get Report) (13%), were the favored large-cap medtech stock names for the second half of the year.
JPMorgan analysts take a guarded view on whether the industry will continue its outperformance. "In our view, the 2H outlook for the sector rests more on exogenous factors than internal ones," such as the dollar's strength and recent industry pricing and business model pressures,wrote JPMorgan medical supplies and devices equity analysts in a note Monday.
"Fundamentals should continue to be strong, and by and large we're expecting solid 2Q results with most companies beating on both the top and bottom lines," the analysts wrote, but they question whether results be "good enough" to sustain the recent momentum. "Moreover, to outperform the Healthcare Index, MedTech will need the pricing and business model concerns that have impacted everything from specialty therapeutics (small and large-cap biotech) to generic manufacturers and drug distributors to persist."
So should investors buy these large-cap favorites? We've asked by TheStreet's in-house chartist, Bruce Kamich, to investigate. Here's what he found.
This daily chart of Abbott Laboratories shows a relatively mature downtrend. The price of ABT has been on the defensive for much of the past 12 months, but prices have not broken the January/February lows despite at least three good attempts in May and June. Prices are above the 50-day and the 200-day moving averages, which are just now turning up. The daily on-balance-volume, or OBV, line made new lows for its move down in May and June, unlike the share price. There is a bullish divergence in May and June between the equal lows in price but higher lows from the momentum study.
This bullish set up may have already played itself out with the recent $5 rally.
In this weekly chart of ABT, we can see that prices have rallied above the 40-week moving average line, but the slope of the line is still pointed down. The weekly OBV line has been pointed down for a number of months, signaling more aggressive selling, but the OBV line has picked up in recent weeks. ABT has had a nice upside run recently, but there is chart resistance in the $44-to-$46 area that may prove a barrier to continued progress.
Bottom line: The burden of proof, in my opinion, is on the bulls to keep the rally going.
In this chart of Boston Scientific, we can see a sideways market for the stock until March. Prices turned up from March. The daily OBV line turned up. The 50-day and 200-day moving averages turned up in April. Prices are above the rising 50-day and 200-day averages.
Looking ahead, we see a bearish divergence in May and July as prices made higher highs, but the momentum study made lower highs giving us a bearish divergence.
In this weekly chart of BSX, we can see that prices are above the rising 40-week moving average line. The weekly OBV line is pointed up and confirming the uptrend, with the volume of trading heavier during weeks when BSX has closed higher. The 12-week momentum study is positive, but the rate of change of prices is slowing, which may be because prices are expensive and investors are reducing positions as prices rally, slowing the advance.
BSX looks positive as long as prices stay above $22.
Edwards Lifesciences is among JPMorgan's top stock picks for the year.
"Edwards is the best-performing S&P Healthcare stock YTD, but as we outlined before we're bullish not only on the second quarter, but the second half and 2017," the JPMorgan analysts wrote. "With the potential for 2Q and 3Q beats in front of it on TAVR [transcatheter aortic valve replacement] market acceleration and the likelihood of significant upward revisions to 2017 estimates, we think Edwards continues to work in the 2H, despite its strong performance to date."
In this daily chart of EW, we can see prices turned up in August from a low and headed higher with a dramatic gap to the upside in April. EW has partially filled the gap, zig-zagging lower to late June. The OBV line made a shallow dip from May into June. The OBV line is back up to its May highs and suggests that buying has been pretty aggressive since September, even during price setbacks. Prices are currently above the rising 50-day moving average line and the 200-day average. The 12-day momentum study in the lower panel is likely to see a bearish divergence if prices make a new high. The momentum readings were very strong in April and probably won't be exceeded even if prices make new highs this month.
In this three-year weekly chart of EW, we see that prices are firmly above the rising 40-week moving average line. The weekly OBV line is neutral, not pointing down and not pointed up with the price action. The trend following moving average convergence/divergence oscillator crossed to the downside above the zero line. Some traders see that crossover as a sell signal, but I and others take it as a liquidate-longs sell signal and not an outright sell. Watch EW above $111 for a bullish breakout, but general market weakness in the third quarter could result in weakness below $99 and additional sell signals.
Zimmer Biomet is also among JPMorgan's top stock picks for the year. The analysts continue to like the stock's "risk/reward, even after the stock's 22% gain YTD," the note said.
"If Zimmer can post a 3.0% or better top-line in the third quarter, we think the P/E discount to the peer's narrows from 26% to 15%, all while estimates are moving higher," the note said.
The movement in Zimmer Biomet gets more exciting in April with the breakout from the previous sideways trading range action. The OBV line turns up in February and supports the rally until the most recent new price high, which is not accompanied by a new high from the OBV line. Prices are above the rising 50-day and 200-day averages. A bearish divergence between higher price highs in May and June and lower momentum readings over the same time period resulted in only a limited decline.
In this weekly chart of ZBH, above, we can see that prices are above the rising 40-week moving average line. The OBV line has been rising with prices from the $90 low. Momentum is fading from its peak readings. Prices have been strong, but they could start to slip. A pullback to $120 would turn the daily chart neutral, and a close below $115 on the weekly chart would awake the bears.
The best charts of this small group of medical technology names may be the last, says Kamich.
In this daily chart of Medtronic, we can see that prices are above the rising 50-day and 200-day averages. The on-balance-volume line has been moving up strongly to confirm the price strength. There are no bearish divergences between the price action and the daily momentum study.
This three-year weekly chart of MDT is really pretty strong. Prices are above the rising 40-week moving average line. The weekly OBV line has been confirming the rally the entire time. There are no bearish divergences between price and momentum. MDT could pull back to $85 without hurting the chart pattern, and a close below $80 would be needed to turn us into bears.