Health-Care Equipment Stocks: In the Pink

S&P recently boosted its outlook on the group to positive. Among its top picks: Becton Dickinson and Varian Medical

By Sam Stovall From Standard & Poor's Equity Research

The S&P 1500 Health-Care Equipment subindustry index was recently added to the High Momentum List, as its trailing 12-month price performance through Aug. 8, 2008, was in the top 10% of all subindustries in the S&P Composite 1500 Index (consisting of the S&P 500, MidCap 400, and SmallCap 600 indexes). Year to date through Aug. 8, 2008, this subindustry index was up 6.3%, vs. a 10.9% decline for the S&P 1500. During 2007, this subindustry rose 10.4%, vs. a 3.6% advance for the "1500."

Take a look at the accompanying chart. As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.

There are 44 large-, mid- and small-cap companies in the S&P 1500 Health-Care Equipment subindustry index, 23 of which are covered analytically by S&P equity analysts. Of those, two are ranked 5 STARS (strong buy): Beckton Dickinson (BDX) and Varian Medical Systems (VAR).

Slowdown Concerns Overblown

Seven stocks in that group are ranked 4 STARS (buy): Coviden (COV), Hospira (HSP), Intuitive Surgical (ISRG), Kinetic Concepts (KCI), ResMed (RMD), St. Jude Medical (STJ), and Stryker (SYK).

Four non-index stocks also carry 4-STAR recommendations: LeMaitre Vascular (LMAT), Mindray Medical (MR), SonoSite (SONO), and Wright Medical Group (WMGI).

Robert Gold follows this subindustry for S&P. On July 24, he upgraded his fundamental outlook on the group to positive from neutral. In Gold's opinion, concerns regarding a slowdown in hospital spending on health-care equipment amid tighter credit market conditions have not been validated during the first half of 2008, and he see no signs of order disruption in most key categories in either the U.S. or Europe.

No Price Compression Yet

Gold also believes second-quarter results from companies in the subindustry so far alleviate fears of weakness in the number of medical procedures performed and unit price compression stemming from the current economic slowdown. S&P Equity continues to look for 2008 sales growth of about 12%-14% and earnings growth of about 18% for the health-care equipment subindustry.

So, there you have it. The group's robust relative strength is supported by a positive fundamental outlook.