Medtech has long been a very profitable area for investors. However, as the space has matured and become more competitive, investors have had to become more cautious when picking stocks in this high-growth space.
Over the past five years, for example, industry giants like Medtronic have lagged broader markets from a capital appreciation perspective due to headwinds from legacy wallets, while up-and-coming device makers such as the diabetes care company DexCom generated life-changing gains for shareholders.
Based on this experience, I believe that the diabetes care specialist Isolate (PODC 2.33%) and the surgical device company Conme (CNMD 1.75%) are poised to be medtech’s top two performers of 2023. Here’s why.
Insulet: A Premier Insulin Pump Franchise
Diabetes care specialist Insulet has been a rare bright spot in the medtech stock space in 2022. While most medical device companies took a major haircut in 2022, Insulet shares rose 14.5% this year.
Insulet’s move to the contrary was fueled by the US launch of its next-generation insulin pump device, Omnipod 5. Omnipod 5 is a tubeless insulin pump that seamlessly integrates with continuous glucose monitoring devices of DexCom to form a so-called “artificial pancreas”.
The launch of Omnipod 5 boosted Insulet’s pump sales in the United States by 42% in the third quarter of 2022, compared to the same period a year ago. But perhaps more importantly, Wall Street expects the diabetes specialist to continue posting dazzling levels of growth over the next few years as Omnipod 5 takes market share from competitors and helps expand the insulin pump category as a whole.
In addition to Insulet’s meteoric organic growth, some analysts have openly pondered the possibility of acquiring the company because of its best-in-class insulin pump franchise. In short, Medtronic, or another struggling medtech giant, might just decide to buy this innovative platform, instead of trying to catch up.
Now, the only downside with Insulet is that the company’s stock is currently up against Wall Street’s fair value estimate at the time of this writing. That doesn’t mean the medtech company’s shares won’t climb even higher, but further appreciation will depend heavily on investor sentiment (rather than company fundamentals).
Conmed: A Great Value Game
Conmed, a medical technology company that primarily focuses on surgical equipment and devices, has slowly transformed into true value-added in 2022. Thanks to the negative impacts of COVID-19, the unfavorable macroeconomic environment and a disruption Temporary due to the implementation of new warehouse management software, shares of the surgical medical device company have fallen 38% this year.
Conmed management, however, has taken definite steps to move beyond these key headwinds. During 2022, for example, the surgical medical technology company acquired both In2Bones Global and Biorez.
Combined with an expected rebound in its core surgical procedures business, these two acquisitions are expected to help boost Conmed’s revenue by 9.5% in 2023. The net result is that Conmed shares are currently trading at a measly 2.27 times expected 2023 sales. That’s one of the lowest valuations in the entire medtech space right now.
What’s the catch? A near-term rebound in this case will likely hinge on general market conditions in 2023. Value stocks, after all, have largely failed to land with jittery investors in this tough macro climate. That being said, Conmed has a fundamentally sound business, and these recent acquisitions will only add to its long-term value proposition.
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