The Supreme Court made an incredibly important ruling on a key case last month. Not that one, the other one. You know, the one where they shot down the “letter of the law, not the spirit” argument central to King v. Burwell, and maintained that health insurance subsidies were legal throughout the land.
It was certainly overshadowed (to say the least) the next day, when the court ruled on marriage equality. But that ruling, the second that established the legality of the Affordable Care Act, is ultimately going to be a big one. If nothing else, it should help the healthcare industry as a whole to move forward full speed with adjusting to a post-Obamacare reality without having to worry about repeal. At least, until a Republican takes the White House – but let’s not muddle things.
Medical Device-makers are Set for Good Health
So what does the Obamacare ruling mean for the small-cap investor? Clearly, the sort of enormous culture shift our healthcare industry is undergoing will create new winners and losers. So who will win and who will lose? That’s a pretty big question, and one that won’t present a clear answer until it’s too late to get any real return on your investment. However, there’s one potential avenue to play: medical device companies.
The rationale being: millions of new people have health insurance, and that trend looks to continue for at least a few more years. As the nation’s uninsured get coverage, that increase in insured people is going to create a requisite increase in demand for medical devices, as the newly insured start getting care.
That increased demand is arguably going to help companies across the industry, but in the small-cap space, there are reasons to focus on device companies, as opposed to others. Most notably, they tend to offer a little more solid footing in terms of metrics to interpret. Investing in the biotech space is notoriously hit-or-miss. Small companies, years of research, millions in costs, and no guarantees of success. If a treatment ultimately gets FDA approval? It’s a bonanza, and you get huge returns. If it doesn’t, though, well, lighting your money on fire would have been just as effective, and a lot faster.
Best Bets on an Obamacare Future
So what are we looking for in these companies? Revenue growth and good gross margins were our primary considerations. Companies that are currently demonstrating an existing market for a proven device are the ones that would appear to be best positioned to capitalize on the crush of newly insured people. From this, we came up with a list of four small-cap companies that would appear well-positioned to take advantage of Obamacare being here to stay.
Harvard BioScience (HBIO)
Harvard Bioscience, a Massachusetts-based maker of a variety of specialty products for use in medical labs. The company is likely a good starting point, because our research team took a deep dive into the company with its research report earlier this year. The report takes a long, hard look at the data and risk factors, and ultimately comes back with a price target that shows a lot of upside for a company that looks to have costs decrease as a restructuring project comes to a close.
Houston-based Cyberonics makes surgically-implanted devices that use electrical signals to treat refractory epilepsy. The Vagus Nerve Stimulation (VNS) Therapy system delivers electrical pulses to the Vagus Nerve, and is also used for treatment-resistant depression.
The company boasts a gross margin of 90.6% and an operating margin of 33.4%. It’s grown revenue and operating income each FY since 2011, and the company’s stock is up over 8% year-to-date. Add to that a return on equity in excess of 20% and advantageous debt-to-equity ratios, and there’s plenty of reason to be bullish about Cyberonics’ future.
MiMedx Group (MDXG)
MiMedx is a Marietta, GA-based company that has developed a process for using human amniotic tissue in a variety of applications, including spine injuries, chronic wounds, and sports medicine. The deployment of the tissue aids in bioactive healing, making it an ideal method for helping repair/regenerate diseased or damaged tissue.
Any investor considering MiMedx is looking like something of a mixed bag at the moment. The company has shown incredible revenue growth, from just under $8 million for FY 2011 to just under $120 million for FY 2014, a year in which the company swung into profit for the first time. Its gross margin is a hair under 90%, and the company continues to project growing profits and sales.
That said, the growth in the company’s stock has more than matched its promise. It’s certainly not trading at a low multiple to its current or future earnings, and that has attracted a short float in excess of 20%. The company needs to keep making gains in revenue and profits and, when it slips, it’s likely going to hurt the stock, as was evidenced by the recent sell-off following its Q2 report.
Cogentix Medical ($CGNT)
Cogentix is the smallest of these four companies by a long shot, coming in at a market cap just north of $40 million. The Minnetonka, MN-based company is engaged in the development and manufacture of uroplasty devices that treat over-active bladder through percutaneous tibial nerve stimulation.
As would be expected, that brings with it a whole host of extra risks based on the inherent volatility of smaller companies. Like, for instance, the nearly 70% slide the company has gone on in the last year. The company has shown declining profits since FY 2013, and it has clearly started to impact share values. Add to that some relatively troubling levels of debt, and it makes Cogentix a very risky play indeed.
However, Cogentix did fit our parameters in terms of revenue growth, with five straight FY increases, and a very strong gross margin at just under 90%. Not to mention, the company is projected a pretty significant increase in EPS next year. If the company has indeed suffered through the worst of it and is en route to figuring out how to cut costs, it could be an attractive (if very risky) play.
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