Healthcare is a great sector in any economy. People always need healthcare, so it's a great place to be in any recession. And you can still find wonderful growth opportunities. We have three med-tech stocks that have gotten super cheap, with really big upsides.
On the market, with expanding opportunities
Patrick Bafuma (iRhythm): Maker of a wearable, single-use heart monitor dubbed Zio, iRhythm helps detect abnormal heart patterns such as atrial fibrillation. This condition, commonly referred to as A-fib, is associated with a fivefold increase in the risk of stroke. iRhythm believes that because its device increases early detection -- and thereby earlier treatment -- patients will subsequently experience lower rates of stroke, heart attacks, heart failure, and hospitalizations.
This cardiac monitoring company believes that it has approximately 20% penetration in its core market of about 5 million patients. This consists primarily of patients who have passed out or who have palpitations, and the company believes there are potentially 5 million patients in select international markets, such as the U.K. and Japan, who would similarly benefit. However, iRhythm is looking to screen patients proactively for A-fib and hopes that A-fib monitoring will become as routine as other screening exams, such as colonoscopies or mammographies. iRhythm believes that this "Silent A-fib" market can add another 10 million or more patients to its U.S. addressable market too.
And this med-tech already has momentum. The company has enjoyed a 30% gross revenue compound annual growth rate (CAGR) since 2018 and just reiterated fiscal year 2022 guidance of 27% to 30% revenue growth. It is aiming to improve upon already enticing 66.2% gross margins in fiscal year 2021, with aspirations of 68% to 69% gross margins for fiscal year 2022. Coming off a record quarter for volume, iRhythm is a proven entity to clinicians and is just beginning to expand its footprint.
An underappreciated growth opportunity
George Budwell (SeaSpine): SeaSpine Holdings is a small cap med-tech company that focuses almost exclusively on developing and marketing cutting-edge technologies for spinal care. Currently, the company sells a variety of spinal implants, a battery of orthobiologics products designed to enhance bone regeneration, and visual surgical aids geared toward spinal surgery, such as the Flash Navigation System with 7D Technology.
What's noteworthy about this tiny med-tech company is that it is on track to grow its annual sales to between $231 million to $235 million in 2022, representing a 20%-plus jump in yearly revenue relative to 2021. To put this revenue forecast into context, SeaSpine's current market cap is a mere $318 million at the time of this writing.
The med-tech company's shares have steadily traded lower with the broader markets over the past nine months. The net result is that SeaSpine's shares are trading at a 60% discount relative to their 52-week highs and are presently valued at well under 2023 projected sales. That's a steal for a promising med-tech company with an exceedingly bright future.
What's the catch? It isn't completely smooth sailing for SeaSpine at the moment. This early commercial-stage company is cash flow negative, and it expects to remain that way until at least 2024. The good news, though, is that the company does have a three-year credit facility already in place, which ought to keep shareholder dilution to a minimum during these early growth years.
One million baby monitors and counting
Taylor Carmichael (Owlet): Owlet is famous for its Smart Sock, a wearable baby device that monitors your child's breathing and heart rates while they're sleeping. The company came public via a special-purpose acquisition company (SPAC) last year, and the stock is still underwater, down over 50% from the SPAC price. On the other hand, the stock has doubled over the last three months. So recent buyers have done quite well.
Why the sharp drop? Owlet shareholders were surprised last year when the company got a warning letter from the Food and Drug Administration (FDA) that it was now classifying its wearable sock as a medical device. That meant the company would need to clear its Smart Sock with government regulators before marketing it to the public. As a result, Owlet had to pull the Smart Sock from the market.
The company rapidly introduced a new baby monitor, the Dream Sock, as well as the Owlet Cam. This sock also monitors the baby's vitals, including heart rate and oxygen saturation. The main difference between the two baby monitors is that the Smart Sock would notify parents if the baby's heart rate or oxygen levels dropped below certain preset levels. The Dream Sock also has notification prompts but just based on how the baby is sleeping.
Owlet is actively communicating with the FDA about the reintroduction of its Smart Sock and its compliance with FDA rules. Owlet is doing the same thing with its new Smart Crib and the Owlet pregnancy band for mothers. So in the future, some of Owlet's devices will be classified as medical devices, while others will not.
Owlet's revenues are essentially flat from a year ago. That's remarkable given that its main product had been pulled from the market, and the company had to introduce a new consumer version of its sock device. Sales of the Dream Sock rapidly increased throughout the quarter, which is why the stock has had a notable swing in the positive direction.
Owlet is a tiny company now, slightly above a $0.50 billion market cap. The company is chasing a massive market opportunity in baby care. Owlet foresees its total addressable market (TAM) rapidly rising from $23 billion last year to $49 billion next year, with an $81 billion market in 2025. With a million babies wearing one of its socks, the company has a powerful moat and mindshare. If it successfully creates an ecosystem around its wearable device, Owlet shareholders will see dramatic returns in the years ahead.