Bear markets are never fun. Downtrodden equity markets are, however, a great time for investors with a long-term mindset to buy stocks.
Keeping with this theme, the 2022 bear market has created a slew of attractive buying opportunities. Cosmetic surgery company InMode (INMD 0.53%), Swiss pharma giant Novartis (NVS -1.06%), and diabetes care behemoth DexCom (DXCM 2.19%) are three highly profitable companies that have been unfairly punished by this irrational market. Read on to find out more about these top stocks in healthcare.
InMode looks set to soar
Taylor Carmichael (InMode): How cheap is InMode stock right now? The stock has a price-to-sales ratio of 7, and a price-to-earnings ratio of 16. A year ago, those multiples were 23 and 53, respectively. When we emerge from this bear market, the multiples of growth stocks will expand back to norms, and I expect the market will again pay a premium for InMode's amazing numbers.
InMode has introduced radio frequency (RF) devices to the world of cosmetic surgery. These procedures are noninvasive, like lasers, except they have applications to the entire spectrum of "body contouring." (Lasers are largely limited to superficial tasks like hair removal.) InMode's devices direct RF waves into the body. For its "body contouring services," InMode says the "treatments use radiofrequency energy to coagulate fat, tone muscles, remodel skin and address cellulite and imperfections such as vascular lesions, spider veins, port wine stains, and leg veins." The upshot is that InMode's devices open the door to noninvasive body sculpting without the dangers of surgery.
This tech breakthrough has made InMode highly profitable, with a 42% profit margin. And the company is still growing fast, with sales soaring 30% in its most recent quarter.What's beautiful about this business is that InMode has over 14,000 installed devices around the world and every device is a platform creating continuing revenue streams for the company as the device is used. In the most recent quarter, InMode reported $15 million in revenue from consumables and service, a 59% year-over-year jump. While that's a small portion of the $113 million in total revenue, the number will grow.
The noninvasive aesthetic market was valued at $53 billion last year and InMode management is optimistic about the opportunity to convert those using lasers to its RF machines. InMode is already on the way to becoming the dominant medical device maker in cosmetic surgery. The shares are dramatically on sale now, even though the company has seen nothing but good news. Over the next several years, I expect the stock to surpass its highs and go a lot higher. At $33, this stock is a steal right now.
An underappreciated $190 billion company
Patrick Bafuma (Novartis): When it comes to profitability on sale, pharma giant Novartis tops my list. The Swiss drugmaker generated core operating income margin of 33% of net sales in the first half of 2022. In the same time period, it generated $4.2 billion in free cash flow, resulting in $19.8 billion in cash on hand.
With such a large sum in the bank and free cash flow solid, Novartis' dividend -- which is currently yielding 4% -- looks safe. Not to mention the yield is higher than those of other pharma behemoths like Merck and Pfizer, which offer 3.2% and 3.46%, respectively. Plus, Novartis' price-to-earnings (P/E) ratio of only 8 is less than either of the other two pharmas, with Pfizer at 9 and Merck at 13.2. Compared to its peers, Novartis seems undervalued.
And the future seems steady. Blockbuster drug Cosentyx, which is prescribed for certain types of autoimmune diseases such as psoriasis, generated sales of $1.3 billion for the most recent quarter, up 12% from a year ago. The monoclonal antibody therapy is expected to generate over $7 billion in peak annual sales and has patent protection until at least 2029. Sales of heart failure medication Entresto were up 33% from a year ago to $1.1 billion for the quarter. And the company sees multibillion-dollar annual potential from the drugs Zolgensma, Kisquali, Kesimpta, and Leqvio -- all of which have U.S. exclusivity protection until at least 2031. With a pile of cash, several therapies blossoming into blockbusters, and an inexpensive valuation, income investors may want to look closer at Novartis.
Don't miss out on this opportunity
George Budwell (DexCom): DexCom is a continuous glucose monitor (CGM) juggernaut. The medical device specialist's CGM franchise, spearheaded by its DexCom G6 CGM system, has yielded enormous levels of revenue growth for the company over the past several years. DexCom's top line is on track to rise by a healthy 18.2% this year, and another 20.2% in 2023. What's more, this CGM titan posted a gross profit of a whopping $449.5 million in the second quarter of 2022. Still, the bear market hasn't been kind to this medical device giant lately, with the company's shares down by a whopping 44% from their 52-week high right now.
Why are investors dumping this top growth stock? In an odd twist of events, DexCom's own success has spurred this prolonged sell-off in its stock. Prior to the start of the bear market in healthcare stocks in late 2021, DexCom's shares were trading well north of 200 times earnings estimates. The bear market has taken a hatchet to nearly every healthcare stock with a premium valuation in 2022 -- with DexCom being no exception. Speaking to this point, most of the medical device maker's key financial metrics, such as revenue, gross profit, and adjusted earnings before interest, taxes, depreciation, and amortization, have all been headed in the right direction in 2022.
Investors have probably taken things way too far, however. DexCom's core target market is still growing by leaps and bounds. In fact, the medical device titan's stock could be trading at well under three times 2026 sales following this sharp decline, depending on how the global CGM market evolves over the next few years. So if you're looking for a bargain, DexCom stock ought to be at the top of your list.