You've probably heard the phrase "inverted yield curve" more over the last week than you have during the last three years. Some are now worried that a recession could be imminent.
While inverted yield curves can be predictors of oncoming recessions, it's important to note that those recessions sometimes don't happen for several years. And the yield curve can quickly reverse its inversion. It's already happened earlier this year. More importantly, stocks can continue to perform very well even while bond yields appear to be out of whack.
Three healthcare stocks are proving this point and then some. DexCom (DXCM -1.05%), Edwards Lifesciences (EW 0.14%), and West Pharmaceutical Services (WST 2.10%) just hit all-time highs. Here's why these stocks continue to soar despite overall market uncertainty and whether they're smart picks to buy now.
Back in March, a short-seller published a report that predicted DexCom's shares would plunge 50% or more with the company's leadership in the continuous glucose monitoring (CGM) market threatened. While that report temporarily caused DexCom stock to drop, its predictions haven't panned out so far. DexCom is up close to 40% so far this year.
The reason behind DexCom's great performance is that business is booming for its G6 CGM system. In DexCom's second-quarter results announced three weeks ago, the company easily beat Wall Street revenue and earnings estimates. DexCom reported year-over-year revenue growth of 39% thanks to higher sales for the G6 CGM system.
CEO Kevin Sayer stated in the company's Q2 conference call that DexCom is "just scratching the surface of the potential" for its CGM technology. Thus far, CGM has focused on patients with diabetes who require intensive glucose monitoring to regulate insulin administration. However, the company is exploring the use of its CGM system beyond these traditionally intensive insulin-using patients by conducting studies for the use of CGM in pregnancy and inpatient settings.
The company also is developing the successor to the G6 CGM. Sayer stated that DexCom expects a limited launch of the new G7 CGM system in late 2020 with a broader launch in 2021. The G7 system will be a fully disposable CGM that's significantly smaller than the G6, less expensive, and will have a longer extended-wear period.
2. Edwards Lifesciences
Edwards Lifesciences is another medical device stock that's having a great year so far. Its shares are up over 40% year to date, with no signs of investor fatigue yet.
Like DexCom, Edwards Lifesciences reported strong second-quarter results driven by increasing demand for its products. The company posted 15% year-over-year revenue growth, topping analysts' projections. Edwards' success has been fueled mainly by its transcatheter aortic valve replacement (TAVR) artificial heart valves, its surgical structural heart and critical care solutions, and its new Pascal transcatheter mitral system.
Innovation is key to Edwards Lifesciences' growth. The company already launched its Sapien 3 Ultra heart valve in Europe and won U.S. Food and Drug Administration (FDA) approval for the TAVR artificial heart valve this week.
The company also thinks that increased adoption of TAVR therapy will be a tailwind in the future. Edwards Lifesciences CEO Mike Mussallem said in the company's Q2 conference call that "we are increasingly confident that there are many patients who would benefit from TAVR and who are not diagnosed, referred, or treated today." Mussallem also noted that the company anticipates solid international growth because of relatively low TAVR therapy adoption outside of the U.S.
3. West Pharmaceutical Services
West Pharmaceutical Services has delivered the most impressive year-to-date performance of these three healthcare stocks at all-time highs. Shares have jumped nearly 50% so far in 2019.
West specializes in making containment and delivery systems for injectable medicines. The company doesn't usually generate spectacular growth. However, West has consistently beaten Wall Street earnings estimates this year and boosted its full-year 2019 revenue and earnings guidance in July.
The company's NovaPure and Westar components have been especially popular with customers that develop biologic drugs, which are made from living organisms. That's great news because biologic drugs themselves have become more prevalent. Eight of the top 10 best-selling drugs last year were biologics.
West Pharmaceutical Services is also growing through acquisitions. The company recently acquired its distributor in South Korea to establish a more direct presence in the important Asian market. CEO Eric Green stated in the Q2 conference call that the company will "continuously look at bolt-on technologies that will enhance our current portfolio."
Are they buys?
I like two of these three high-flying stocks. My view is that DexCom should have plenty of room to run, with continued momentum for its G6 CGM and tremendous potential for its new G7 CGM on the way. I also think that Edwards Lifesciences' prospects look great, especially now that it's won FDA approval for the Sapien 3 Ultra heart valve.
But while I like West Pharmaceutical Services as a business, I'm not convinced the stock can keep its upward trajectory going for too much longer. Shares trade at more than 42 times expected earnings. West isn't growing fast enough to deserve that lofty valuation, in my opinion.