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2 Stocks to Buy, 2 to Sell in Medical Appliances

And as a bonus, here's what to do with sputtering Intuitive Surgical

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It was only a matter of time before one of the hottest products in the medical appliance industry would come under fire for safety concerns.

Intuitive Surgical’s (NASDAQ:ISRG) da Vinci Surgical System, which costs $1.5 million per machine, has been the subject of at least 10 lawsuits in the past 14 months. Those lawsuits have prompted the Food and Drug Administration  to investigate whether Intuitive’s robotics are a serious threat to patient safety.

The FDA’s involvement, along with some other concerns, has ISRG’s stock down 14.7% in the past month and 8.4% in the last year — 25 percentage points worse than the S&P 500.

But where does ISRG compare to other medical device manufacturers? Here’s a look at two buys and two sells — plus a verdict on what you should do with ISRG stock.

Buy #1: Sirona Dental Systems

The next time you visit your dentist, be sure to look around the room. There’s a good chance that some or all of the equipment your dentist uses is manufactured by Sirona Dental Systems (NASDAQ:SIRO), a New York-based company that’s grown from $39 million in revenue in 2003 to just under $1 billion in its latest fiscal year ended September 2012. In less than a decade, it has become a dental industry powerhouse.

Sirona’s revenue diversification is what makes itsuch a good company. It generates business from four operating segments: Dental CAD/CAM Systems, Imaging Systems, Treatment Centers, and Instruments. Its CAD/CAM and Imaging Systems accounted for 70% of its overall revenue in the first quarter ended December, 2012.

Thanks to the introduction of its new Cerec Omnicam scanning tool, its CAD/CAM business grew by 16.5% in the first quarter, making the segment not only the biggest growth area for the company but also its most profitable. Continued success of Omnicam will mean continued growth on the top- and bottom-line.

Sirona’s stock isn’t cheap. Since its low of $9.88 in December 2008, the stock has gained 615%. Year-to-date it’s up almost 10% on top of a 46% increase in 2012. But consider this: Noted value investor Ruane, Cunniff & Goldfarb is Sirona’s third largest shareholder, owning 5.3% of the company. It’s been accumulating its position since the third quarter of 2011.

Ruane, Cunniff & Goldfarb’s investment alone isn’t especially noteworthy. However, consider that its Sequoia Fund (MUTF:SEQUX), which has an extremely low turnover of stocks, holds about 41% of Ruane, Cunniff & Goldfarb’s total position. A long-term investor like myself can immediately see the benefit of owning Sirona’s stock well into the future.

Buy #2: ResMed

According to recent data, as much as 26% of the population suffers from sleep apnea, and 35% of those cases are moderate to severe in nature. Not being able to breathe while sleeping is no laughing matter.

Sleep apnea is more prevalent in people with obesity, which is a significant portion of the U.S. population. The estimated total cost of obstructive sleep apnea in the U.S. is $165 billion. Therefore, investing in a company like ResMed (NYSE:RMD), whose products help those suffering from OSA, is a good pick, given the demographics.

Financially, you can’t do much better. ResMed’s second quarter revenue grew 14% (constant currency) year-over-year, its 72nd consecutive quarter of revenue growth. If you’re looking for consistency, you can’t get much better than RMD.

Over the past five years, RMD has grown revenues and net income 14% and 19% per annum, respectively. Earnings per share have grown 20% annually over the past five years, yet its stock’s annualized total return in that time is just 15.9%. Over the long haul, stock prices tend to follow earnings. With a net cash position of $658 million at the end of December, it’s no wonder ResMed repurchased 1 million of its shares in the second quarter.

In the past decade ResMed has had just two losing years. This is a great stock for the foreseeable future.

Sell #1: Opko Health

Opko Health (NYSE:OPK) is up 61.6% in the last three months and sits within 3% of its five-year high. Those numbers come in the face of an operating loss of $37 million in 2012, on revenue of just $47 million. In fact OPK has never made money since billionaire Dr. Phillip Frost merged three companies together to form the current company in 2007.

Article printed from InvestorPlace Media,

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