A trip to the ER is fun for nobody
This weekend, I had the unfortunate honor of taking a friend to the emergency room. Having spent a good deal of time in hospitals over the past four years as a result of our growing family, I’ve learned to bring a little small-cap research to help pass the time. The trips to the hospital when my sons were born were positive and tinged with excitement—so squeezing in a little research into the best small-cap stocks in the healthcare sector was fun. The trip this weekend was the polar opposite.
My good friend had severe kidney pain and was extremely stressed out. And for good reason; it was her second trip to the ER in three days for the same thing. A CT scan, ultrasound, blood tests and so forth hadn’t turned up anything different on the second trip. It seemed like kidney stones, but without evidence, that couldn’t be pinned down as the cause.
The experience reminded me of two things. First, just how complex the human vascular system is (the function of the kidney is to filter blood and turn the waste into urine). The second was how important access to good health care is, and how frustrating it is when quick answers (and solutions) aren’t available. With mobile devices and personal assistants, we’re programmed to think the answer to everything is just a few seconds away. But there are still plenty of mysteries out there.
The adventure was also a good reminder of why healthcare is such a solidly performing sector. Even when quick answers aren’t forthcoming, there’s always a new process or technology working to solve the puzzle. That market demand, even in the face of constant pricing pressures, is a good backdrop for growth in the healthcare sector—and for the performance of quality healthcare stocks.
Edwards Lifesciences: +3,000% and Counting
The human circulatory system is amazing. But it doesn’t always run smoothly. Issues are particularly prevalent in the cardiovascular system, which consists of the heart and blood vessels—arteries, veins and capillaries—that move blood around the body.
Cardiovascular disease (CVD) is the leading cause of death in the world. Unfortunately, some people are dealt a bad hand and are born with conditions that lead to CVD. But it’s estimated that 90% of CVD is preventable. A person who smokes, eats poorly and doesn’t exercise runs a higher risk, just as a texting driver increases his or her chances of being an accident.
Around 20 million people worldwide suffer from peripheral vascular disease (PVD), a form of CVD that occurs when there are issues with the blood vessels beyond the heart and brain, for instance when the arteries and veins that carry blood to the arms and legs become narrowed, blocked or weak. The typical causes are all too common: in addition to smoking, poor diet and lack of exercise, there’s high blood pressure, diabetes, high cholesterol and unfortunately, aging.
Surgery may be required when prevention, treatment and lifestyle changes aren’t enough. And that’s fairly often.
Fortunately, rapid advances in technology mean that vascular surgeons have access to medical devices that make complex procedures a little easier and longer lasting. Open vascular surgery is still the most common types of procedure, but increasingly, endovascular procedures (less invasive procedures that rely on imaging technologies) are being performed around the world.
Surgeons can change the direction of blood flow, bypass blocked vessels and even replace damaged arteries with artificial ones. Special patches are available that can be sewn to damaged veins to make them stronger. Devices can be installed inside blood vessels to keep them from getting blocked. And there are even mini-vacuums available to remove damaged veins completely.
These are just a few of the highly specialized devices in use by over 5,500 vascular surgeons around the world. And with an aging population and the increasing prevalence of PVD, the demand for next-generation medical devices to treat PVD has grown. Today, the market for peripheral vascular devices is around $4 billion.
There are a number of large-cap companies that serve healthcare markets with devices and technologies to help treat and manage CVD and PVD. A few of the better-performing names are Baxter International (BAX), Boston Scientific (BSX), Medtronics (MDT), C.R. Bard (BCR) and Edwards Lifesciences (EW).
Edwards Lifesciences in particular is a tremendous success story. The stock is up 3,000% since its IPO in 2000 and its success continues today—it’s up 50% over the past year!
The Next Edwards Lifesciences is a Buy Right Now
But while I like Edwards Lifesciences, it’s far from the highest potential stock in the healthcare sector right now. Instead, I’m looking for the next Edwards Lifesciences, a company that will go on to rise several thousand percent in the coming years. A few weeks ago, I presented a company to Cabot Small-Cap Confidential 2.0 subscribers that I think has that potential.
I wrote:
“The company reminds me of an early-stage Edwards Lifesciences (EW)—a company that grew out of an entrepreneur’s dream to make the first artificial heart. That was in 1958, 42 years before Edwards Lifesciences debuted on the NYSE in 2000. The stock is up almost 3,000% since!
“Similarly, the company I feature today emerged from one man’s quest to improve upon the status quo in vascular surgery. His journey started over 30 years ago, and his company went public in 2006. I don’t know if it will rise by 3,000% over the next decade, but I do think it will pay off handsomely for investors that buy in now.
“The company makes highly specialized devices used in peripheral vascular surgery. This is a $4 billion global market, and growing. Yet many of the devices are so specialized and used in relatively small quantities, that large companies haven’t entered the market. As a result, its high profit margins are somewhat insulated.
“Though the company is small today, it is steadily growing sales of existing products and adding incremental growth through internal R&D and acquisitions of new products. Moreover, it is consistently profitable—so much so that it even pays a small dividend! But don’t let that fool you; this isn’t a stodgy dividend stock. It just reported a nearly 60% increase in net income and has almost 10% of market cap in cash, waiting to be deployed on growth-driving initiatives.”
This small-cap stock checked all the boxes required for inclusion in Cabot Small-Cap Confidential 2.0:
• It’s a pure-play small-cap stock benefiting from a long-term growth trend.
• It has a great business model.
• It has excellent products now, and shows evidence that more excellent products are coming in the future.
• It has solid fundamentals, including revenue and earnings growth.
• And finally, the window of opportunity to establish a position was—and remains—open.
Fortunately for my friend, she won’t need any of the specialized devices this company makes. Her kidneys appear to be on the mend. But for millions of people who do require surgery to resolve an issue, this company’s products will likely be at the top of their surgeons’ lists. That’s because the company sells directly to surgeons. It’s one of the key strategies the surgeon-founder implemented when he started the company, and it continues today.
If you’d like more information on this small-cap stock and others, consider a subscription to Cabot Small-Cap Confidential 2.0. You can get started right here.
I expect small-cap stocks to keep leading the market higher in the second half of 2016. And I’ve put together a portfolio of stocks that should do far better. We’re already seeing double-digit gains in our stocks within weeks, with my last four stocks up an average of 17%!
