In today's uneven stock market, investors end up overlooking many appealing companies. And right now, they are particularly ignoring growth stocks. This usually happens when fears surface that the global economy could be heading into recession.
In times of economic stress, the health care sector is usually seen as a safe haven. But recently, many leaders in the industry have also been out of favor.
The passing of a historic health care bill in the United States last year has increased concerns that regulation will cut into profits of health care firms. Among those concerns: a 2.3% excise tax on medical-device sales, set to begin in 2013. This is obviously a negative aspect, but it isn't likely to adversely affect the inherent appeal of companies with leading devices, technologies and global growth platforms.In times of economic stress, the health care sector is usually seen as a safe haven. But recently, many leaders in the industry have also been out of favor.
Add it all up, and I see a rare opportunity for investors to buy quality health care stocks.
Medical device firm St. Jude (NYSE: STJ), for instance, has such appeal. Besides a focus on growth, one of the company's main goals is to save and improve lives with its medical devices, which have become vital in the treatment of cardiac, neurologic and chronic-pain disorders. The company makes, for example, mechanical heart valves and implantable cardioverter defibrillators (ICDs), which detect cardiac arrhythmia and correct it by delivering shocks to the heart.
This wide range of technologically sophisticated devices is being widely adopted across the world, which has put the St. Jude on a remarkable growth trajectory. Last year, healthy sales of existing products, new product introductions and increased global reach resulted in a 10% sales growth to $5.2 billion, compared with $4.7 billion in the year before. In fact, 2010 marked the first time sales exceeded $5 billion. Earnings growth was even better, rising more than 20% to $2.75 per diluted share. In addition,! foreign sales -- which make up more than half of the company's total sales -- are growing in excess of 20% a year.
The company is also impressively profitable. Last year alone, it boasted a net profit margin of almost 18%. This represented the highest margin in the past five years, placing the company well ahead of rivals and the market in general. To put this into perspective, the health care industry as a whole has a net margin of roughly 6%, while the S&P500 average is only about 12%.
Growth expectations for all of 2011 speak to St. Jude's operating consistency. Analyst projections are currently calling for sales growth of 10% to $5.7 billion and $3.27 in earnings per share, a growth of nearly 20%. But these levels of annual increases are nothing new to existing shareholders. In the past five years, annual sales and profit growth have averaged 12% and 21.5%, respectively. The past decade is equally impressive, with annual sales growth of 16% and annual profit growth of 22%.
St. Jude also has a healthy new lineup of devices that will likely drive growth going forward. Included in the new product mix are neuromodulation devices that deliver small amounts of electricity to the nervous system to help treat chronic conditions such as Parkinson's disease and migraine headaches. Its management team estimates 18 new growth drivers should generate $18 billion in additional sales within the next five years.
In terms of archrivals, St. Jude competes against pure-play rivals such as Medtronic (NYSE: MDT) and Boston Scientific (NYSE: BSX). Medtronic boasts a market capitalization of nearly $36 billion, which is close to three times St Jude's market cap of $12.5 billion. But despite an equally impressive lineup of medical devices, its already substantial size is a barrier to double-digit growth. Boston Scientific has a current market cap of less than $9 billion, but has had obstacles to overcome, including the acquisition of Guidant back in 20! 06, whic h hamstrung it with too much debt, and manufacturing problems that continued well after the purchase was completed.
For Pacific Sunwear of California, Inc., the rally's been underway since December, but didn't get really juicy until this week when PSUN moved above its 200-day moving average line (green) for the first time since early 2011. That being said, it's worth noting that (1) the buyers barely even flinched when the 200-day line was approached, and (2) the buying volume actually increased as PSUN was plowing through that key long-term average. As for the underlying reason though, a couple of quarters' worth of rising top line and shrinking losses may get a big chunk of the credit.