Healthcare stocks have been on a roll, and it looks like this trend will continue for the rest of 2013. The bull case for healthcare has been known for some time — the population is aging, and the need for health-related products and services should continue to rise faster than the rest of the U.S. economy. The real drag on these stocks has been the fear of uncertainty, but the passage the president’s healthcare reform has largely removed that overhang. Many of these stocks have superior fundamentals, and their stocks are finally reflecting the companies’ potential.
SurModics (NASDAQ:SRDX) is a medical equipment company that receives the very highest grade Portfolio Grader uses — an “A.” The company makes coatings for medical equipment and drug delivery systems, and earnings have exploded in the past year. The coating technology allows medical devices to be inserted with greater ease and less chance of generating harmful particulates. Earnings have been growing at 25% on average over the past five years but in the fourth quarter the company showed a 90% increase on a year-over-year basis.
Management has issued optimistic guidance for the rest of the year, and analysts are rushing to upgrade the stock and raise their earnings estimates for 2013. SurModics has surpassed the analyst estimates for three quarters of the past four, and I would not be surprised to see the company post another positive surprise in May.
AMN Healthcare Services (NYSE:AHS) is another company seeing enormous increases in its business and posting huge revenue and profits growth. The company provides healthcare staffing services including temporary nurses and physicians to the hospital industry. Earnings have doubled over the past year; in the last quarter they were up more than 300% over the comparable year-ago profits.
With the passage of the healthcare measure many hospitals are finding it easier to budget and fill their staffing needs. We are also seeing patients begin to schedule more elective procedures and surgeries as the economy shows signs of recovering. Both of these trends provide a strong tailwind to AMN Healthcare and its stock.
Management has been using its strong cash flow generation to pay down debt, paring the long-term debt by more than $100 million in the past five years. The solid performance has analysts raising their estimates with ofur increases in the past month alone. AMN Healthcare gets the top mark of “A” from Portfolio Grader, and I expect to see a fifth consecutive positive earnings surprise when the company reports in late April.
Healthcare stocks have done very well so far in 2013, and the economic fundamentals favor increased revenue and earnings growth for this sector. Owning the best stocks in the healthcare sector should be an excellent strategy for capturing profits the rest of the year.