At this time last year, the sentiment on Wall Street for the medtech sector was very poor. The group started 2013 trading at a 1.2% discount to the S&P 500, but ended the year at a 2.3% premium. On average, large cap medtech stocks increased more than 30% for the year. The bearish sentiment that prevailed in January of 2013 is gone, but expectations are still tempered. That may be the perfect storm for investors.
The Bank of America Merrill Lynch team has a new research report that examines the stocks with the best chance for another year of outperformance. Despite still having a slight premium to their large cap S&P 500 counterparts, large cap medtechs are still trading well within the five-year range. The Merrill Lynch report also has a complete list of stocks to buy in all market cap ranges for 2014. With the concerns on the details of the Affordable Care Act mostly out of the way, investors who buy these top names now may be well rewarded by this time next year.
Here are the three top names to buy sorted by market cap. In addition we have added the other top stocks to buy for 2014.
St. Jude Medical Inc. (NYSE: STJ) is the top large cap idea at Merrill Lynch for 2014. The analysts think that the company should benefit from both increased pipeline visibility in 2014 and potentially industry consolidation long term. In addition, they expect accelerating revenue growth to match up with the improving pipeline, which gives investors two strong attributes for the stock this year. Investors are paid a 1.6% dividend. The Merrill Lynch price target is $68. The Thomson/First Call estimate is $62. St. Jude closed Wednesday at $65.40.
CareFusion Corp. (NYSE: CFN) is the top midcap stock idea at Merrill Lynch for 2014. The company recently announced the completion of its acquisition of the Vital Signs division from GE Healthcare in the United States, China and certain other geographies. Vital Signs is a leading manufacturer of single-patient-use consumables for respiratory care and anesthesiology, a $3 billion global segment. Vital Signs has annual revenue of approximately $250 million. This is a strong addition in terms of revenue and portfolio. Merrill Lynch has a $45 price objective, while the consensus figure is posted at $42. CareFusion closed Wednesday at $40.31.
Globus Medical Inc. (NYSE: GMED) is a top small cap name to buy for this year. The analysts at Merrill Lynch expect a very strong fourth quarter from the company when it posts results. It should be noted they think the company may give conservative guidance, and the year may be more back-end loaded for revenue. The company offers approximately 100 innovative fusion and disruptive technology products that address an array of spinal pathologies, anatomies and surgical approaches. The Merrill Lynch price target is $22, and the consensus target is at $23. The stock closed Wednesday at $19.80.
Here are the other top medtech names to buy at Merrill Lynch for 2014.
Baxter International Inc. (NYSE: BAX) is a sector standout, and it remains a top name to buy at Merrill Lynch. The medical product segment should also be a steady performer for Baxter. In addition to supplying items such as IV solutions, infusion pumps, injectables and anesthesia gases to hospitals and their pharmacies, Baxter offers contract manufacturing services to drug firms and is a leading provider of at-home dialysis solutions outside the United States. With its acquisition of Swedish dialysis player Gambro, medical products is likely to remain Baxter’s largest overall business for the foreseeable future. Investors are paid a solid 2.8% dividend. The Merrill Lynch price target is $82, while the consensus is posted at $77.50. Baxter closed Wednesday at $70.02.
CR Bard Inc. (NYSE: BCR) is another strong midcap name to buy for 2014. The company offers vascular products, such as percutaneous transluminal angioplasty catheters, chronic total occlusions catheters, guidewires, fabrics, meshes, introducers and accessories; peripheral vascular stents, covered stents and vascular grafts; vena cava filters; biopsy devices; and drug-coated balloon devices to treat peripheral vascular disease and heart arrhythmias. Investors are paid a tiny 0.6% dividend. Merrill Lynch has a $150 price target. The consensus is set at $138. The stock closed Wednesday at $132.73.
Covidien PLC (NYSE: COV) is another large cap name that the Merrill Lynch team still prefers for 2014. With the continued growth of minimally invasive surgeries around the world, Covidien stands to still be a market leader. By the company’s estimation, it holds around 45% share of the market for endomechanical tools like staplers and energy-based cutting and sealing devices. Investors are paid a 1.9% dividend. Merrill Lynch has a $70 price target, and the consensus is at $75. Covidien closed Wednesday at $68.25.
Intuitive Surgical Inc. (NASDAQ: ISRG) was perhaps one of the strongest momentum stocks of the past decade, until it cracked this year. With the dual hammer of botched robotic surgeries and earnings and system sales drop-offs, the jury is decidedly still out on this former powerhouse name. The bears have circled the stock, and think there could be another negative shoe to drop. That said, Intuitive Surgical dominates the robotic surgery field with its da Vinci system and could roar back to life this year. The Merrill Lynch price target is $460, and the consensus is lower at $425. The stock closed Wednesday at $380.46.
The Merrill Lynch analysts feel that there is little doubt that the structural changes going on in the U.S. health care system (higher co-pays for example) have had a negative impact on health care utilization since 2008. There is also little doubt that the economic slowdown has had an impact, but specifically quantifying the impact of one versus the other has obviously been difficult. With a brighter outlook for the domestic and global economy, and a better idea on how the ACA will affect spending, the top medtech stocks to buy may be a great portfolio addition for 2014.