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3 Cheap Surgical Stocks to Buy Now Before They Bounce Back

By Jim Halley – Jul 9, 2020 at 6:22AM

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The pandemic hit Zimmer, Smith+Nephew, and Stryker hard -- but they'll soon rise again.

The global pandemic has devastated orthopedic companies that manufacture hip, knee, shoulder, and dental replacements. The elective surgeries that use these healthcare products have mostly been put on hold during the COVID-19 pandemic.

Shares in Smith+Nephew (SNN -1.87%), Zimmer Biomet (ZBH -1.67%), and Stryker (SYK -0.93%) are all down more than 10% year to date. All three have suspended their 2020 guidance. The doom and gloom of their most recent quarterly reports have helped keep share prices down.

Assuming the global pandemic isn't with us forever, this may be the best time to pounce on these companies. Their long-term growth possibilities remain upbeat. One study puts the orthopedic implants market at $68.2 billion in global revenue by 2026.

In the meantime, all three offer dividends to reward unflappable investors.

An older man talking with doctor.

Image source: Getty Images.

Smith+Nephew was coming off a record year

Smith+Nephew said it ended 2019 with a record $5.1 billion in revenue, a gain of 4.4% over the previous year and its seventh consecutive year of revenue growth. Those sales were driven by a reported 31.6% gain from its "other reconstruction" segment, which includes capital sales from robotic surgery units and an orthopedic joint reconstruction business acquisition from BrainLab that showed 14% revenue growth. 

In its first-quarter report issued Feb. 20, the company said its revenue dropped 7.6% year over year. It expected the coronavirus pandemic to affect its business, but said things would stabilize by the second quarter. That may not happen, but at least the pace of the revenue drops seems to be declining. Revenue in April was down a reported 47%, but May was only down 27%, and the decline was 12% in June, according to a company update on the second quarter.

This British company, which has been putting out a dividend since 1937, raised its annual dividend to $0.231 in 2019. Combined with an interim dividend of $0.1119 last year, the company's dividend yield was 1.88% over the trailing 12 months (TTM).

Zimmer Biomet has seen steady gains over the past decade

In its annual report, Zimmer Biomet said sales rose 0.6% last year and its 2019 adjusted diluted earnings grew 3% from 2018. Before the pandemic hit, the company said it was expecting 2.5% to 3.5% growth in revenue this year. The first-quarter report, however, showed just how much business slowed because of the pandemic. Net sales were $1.7 billion, down 9.7% year over year, and the company's net earnings were negative $509 million.

Zimmer has increased revenue for 10 consecutive years. While that trend may end this year, the company's business looks solid. It has seen healthy growth in its Asia-Pacific business, and its ROSA robot-assisted knee surgery platform, which was brought online in 2019, has helped sales.

The Warsaw, Ind.-based company kept its quarterly dividend at $0.24 per share, the same as it has been for the past five years, giving the dividend a yield of 0.81% (TTM).

Stryker is as solid as they come

Stryker (SYK -0.93%) recorded its 40th consecutive year of revenue growth in 2019, surpassing $14 billion for the first time to hit $14.9 billion, an increase of 9.4% over 2020. Adjusted net earnings per diluted share rose 13%.

In the first quarter, the company reported a 2% rise in sales year over year, but adjusted net earnings per diluted share were down 2.1% compared to the same period in 2019.

Located in Kalamazoo, Mich., Stryker has increased its quarterly dividend for 10 consecutive years, including a 9% raise this year to $0.57 per share, giving it a yield of 1.25%.

Recovery is not a matter of "if," but "when" 

Of the three, I like Stryker, as it has weathered the pandemic the best so far. The chart below shows how far off the three stocks have fallen from their share-price highs year to date. Because of its continued sales growth, Stryker has fallen the least.

Chart showing the companies' percentage drop from share-price highs year to date.

Image Source: YCharts

I also like Smith+Nephew because it had the second-best growth of the three companies last year, behind Stryker. However, if you are looking for momentum, Zimmer's shares have had the biggest rise in the past three months -- more than 16%.

When the coronavirus pandemic subsides, all three of these companies look likely to provide investors with opportunities for exciting long-term growth.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Stryker Corporation Stock Quote
Stryker Corporation
SYK
$206.93 (-0.93%) $-1.95
Smith & Nephew plc Stock Quote
Smith & Nephew plc
SNN
$22.55 (-1.87%) $0.43
Zimmer Biomet Holdings, Inc. Stock Quote
Zimmer Biomet Holdings, Inc.
ZBH
$106.21 (-1.67%) $-1.80

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