When looking for the best healthcare stocks to buy, it’s important to remember that some of the biggest names in healthcare may not be your wisest plays right now. Sure, some of the guys in Big Pharma can throw off juicy dividends and offer scale … but is there any growth there?
For aggressive investors who aren’t afraid of off-the-beaten-path healthcare investments, the best small-cap stocks to buy now in the sector are actually scattered across myriad niches that don’t fall into conventional thoughts about medical devices or hospitals.
On my list of stocks to watch including home healthcare companies, medical waste stocks and even a company that deals mainly in blood plasma.
That’s because when you’re small, you can be focused — and the best healthcare opportunities right now aren’t in decade-old drugs that are about to go off patent or complicated hospital systems that have to navigate a labyrinth of regulatory red tape.
I like small-cap stocks because they are agile and willing to ramp up quickly when they find a strong niche.
And here are my favorite small-cap stocks to buy now in the medical sector.
Best Small-Cap Healthcare Stocks: Sage Therapeutics Inc (SAGE)
YTD Performance: +65% vs. +2% for the S&P 500
Market Cap: $1.7 billion
Since no list of small healthcare stocks can be without an early-stage biotech stock, I’ll just put my pick right up front to end the suspense.
Sage Therapeutics Inc (NASDAQ:SAGE) is focused on treatments rare diseases, particularly those that affect the central nervous system. It’s a prototypical development-stage that isn’t profitable, choosing instead to burn cash in the hopes of research and clinical trials that result in a blockbuster drug.
But why Sage and not the countless other biotechs out there?
Well, SAGE just pulled of an impressive IPO in 2014, spiking 67% out of the gate and showing the big potential Wall Street sees in this company. And even forgetting the pre-IPO price you and I aren’t privy to, SAGE has still shot up 100%, meaning us poor folks who weren’t in on the ground floor were given a quick doubler if we were savvy enough to buy in on Day 1 of public trading.
Sage isn’t your typical fly-by-night biotech, and is a top holding for one of the most respected and longest-running healthcare hedge funds out there, OrbiMed Advisors. OrbiMed runs more than $14 billion at last tally, and boasts an expert staff of investors, scientists and doctors who can properly assess a company like SAGE.
Their weight behind this $770 million company is telling, and an important endorsement.
Last year, SAGE received a “fast track” designation for its epileptic seizure treatment, known right now as just SAGE-547. The treatment has also been designated as an “orphan drug,” meaning that there aren’t many other options for patients suffering from the disease it targets. That’s great for doctors looking for new treatments, but also good for SAGE because it means very little competition should the drug be successful.
This notion of chasing niche drugs where there is little competition and big margins is an effective tactic for early-stage biotech stocks. SAGE-547 is expected to begin Phase 3 trials sometime this year, and should it receive positive results, the door could be open to big and sustained profits from this medication and others that are sure to come out in the years ahead.
Best Small-Cap Healthcare Stocks: Sharps Compliance Corp. (SMED)
YTD Performance: +63%
Market Cap: $100 million
Of the best small-cap stocks out there, medical waste disposal services firm Sharps Compliance Corp. (NASDAQ:SMED), is perhaps the simplest to understand and the most dramatic in its growth potential.
SMED is a company that disposes of needles and other medical waste. Its biggest potential comes from the expansion in home healthcare providers retail pharmacies and even veterinary offices that require injectable medications — and thus safe disposal of the needles.
Its flagship product is the Sharps Recovery System, which you may have seen in all manner of facilities, from highway rest stops to public restrooms. The basic idea is a sealed, puncture-resistant container that can simply be shut and mailed via the Postal Service to an appropriate disposal facility.
Sharps services most clients via old-fashioned route-based pickup, but this unique idea of medical waste disposal anywhere is a great concept — particularly in the age of diabetes when injectable medications like insulin are increasingly common in public life.
Now, Sharps has had its trouble with profitability in the past and as admittedly very small at a mere $100 million in market capitalization. But the technicals look good, the company has been profitable or at least broken even for three straight quarters and is predicted to more than double EPS from an estimated 5 cents this year to 13 cents in FY2016.
Best Small-Cap Healthcare Stocks: Natural Health Trends Corp. (NHTC)
YTD Performance: +87%
Market Cap: $255 million
Not your average healthcare stock, Natural Health Trends Corp. (NASDAQ:NHTC) is actually a retail outfit that markets personal care, wellness and healthfood products. Like many similar companies, including Herbalife Ltd. (NYSE:HLF), NHTC uses direct marketing to sell its goods at strong margins and with minimal overhead.
The difference is that NHTC is actually an emerging-market play, with a whopping 98% of revenue made outside North America. In fact, Hong Kong is the leading region for sales, with $40.6 million in Hong Kong revenue last year — about 77% of the company’s $52.5 million in total revenue on the year.
As a direct seller, NHTC does face some of the same direct-seller criticism that is current levied at Herbalife right now. But this tiny stock doesn’t suffer from the same law of large numbers that HLF does, nor the scrutiny that comes with hedge fund icon Bill Ackman staking his reputation on the company going up in smoke.
Short interest is modest, performance is great and there is tremendous untapped potential both in existing markets across Asia and in Western markets that are a natural fit for this natural products company.
Best Small-Cap Healthcare Stocks: Almost Family Inc (AFAM)
YTD Performance: +55%
Market Cap: $430 million
Almost Family Inc. (NASDAQ:AFAM) is an exciting small-cap healthcare stock that is at the center of the home healthcare revolution. AFAM provides of home nursing and personal care services that include everything from physical therapy and pain management to meal prep and housecleaning.
As the baby boomer population gets older and healthcare professionals increasingly favor “aging in place” as a way to maintain both quality of life and patient health, AFAM stock has benefited from both a strong demographic push as well as a great business model.
Thanks to the challenging nature of negotiating with Medicare and licensing quality home health providers, the industry is quite fragmented. That has allowed Almost Family both to grow into underserved markets and snap up smaller players like New York-focused WillCare for about $50 million recently.
Since Almost Family is primarily focused in the Southeast, this is a great purchase and will increase the personal care segment of AFAM about nearly one-third. Investors have been thrilled by the prospects of this deal and have bid up Almost Family rapidly as a result in hopes of future revenue and earnings growth.
Best Small-Cap Healthcare Stocks: China Biologic Products Inc. (CBPO)
YTD Performance: +48%
Market Cap: $2.5 billion
China Biologic Products Inc. (NASDAQ:CBPO) is, as the name implies, a China-based drug company. But the business model is quite interesting and differs greatly from conventional healthcare stocks.
China Biologic Products uses plasma to make regulator-approved treatments and products including human albumin and immunoglobins that are key in many medical products and treatments, and does so across more than a dozen plasma collection stations.
It sounds crazy to think that blood can be untrustworthy for patients and medical providers, given the strict safeguards in the U.S. But if you are familiar with any of the many product scandals in China including tainted baby formula or tainted prescription drugs, it shouldn’t come as a surprise that human blood is a big trouble spot.
That, to me, makes CBPO a great opportunity for investors as hospitals and other health centers in China increasingly demand clean blood and plasma supplies — and companies like China Biologic Products are not just favorable options to bolster safety and trust, but also to ultimately help these medical facilities stay in operation as modern medical treatments see increased demand.
CBPO is one of the larger stocks on this list, with a market cap of about $2.5 billion. However, thanks in part to the obscurity of the stock as well as its expensive share price, investors should take care to use limit orders when trading given that the company regularly trades less than 100,000 shares each day and a modest-sized order at the wrong time could result in a gap up in prices and overpaying for this stock.
Best Small-Cap Healthcare Stocks: Merge Healthcare Inc (MRGE)
YTD Performance: +57%
Market Cap: $550 million
Merge Healthcare Inc. (NASDAQ:MRGE) just made my list of the best cheap stocks to buy now, since it’s trading for less than $10 per share. But this company is not just one of the best low-priced issues — it’s also one of the best small caps in the whole healthcare sector.
Merge is not a pharma company, but actually a kind of hybrid between a healthcare stock and a tech stock. MRGE develops software to help share medical images. And given the rise of digital medical imaging, the ability for doctors to collaborate on the cloud and the need for secure storage in light of hacking and personal information concerns, a company like Merge is in the right place at the right time.
And judging by the 57% jump since Jan. 1, it looks like investors agree.
MRGE stock has recently attained steady profitability, and has put together a string of strong earnings reports that have regularly met or topped expectations. Revenue is growing at a double-digit clip annually, and profits continue to edge higher as well.
Q1 earnings for MRGE stock hit at the end of April, and shares seem to be trending higher in anticipation … so don’t wait too long to pull the trigger if you research this stock and like what you see.
Best Small-Cap Healthcare Stocks: IGI Laboratories, Inc. (IG)
YTD Performance: +3%
Market Cap: $475 million
As Louis wrote recently, the company makes topical creams and other solutions for conditions including fungal infections and psoriasis. It’s not incredibly sexy, but it is a niche that is quite profitable and has a lot of growth potential.
In fact, while IGI has largely tracked the market this year, a longer-term view shows the stock up about 120% in the last 12 months!
The company’s patented Novasome line is “very popular with some of the biggest names in fashion and pharma,” according to Navellier, including Johnson & Johnson (NYSE:JNJ), Estee Lauder Companies Inc (NYSE:EL) and others.
The big potential, in his words, is that “the U.S. topical market is a $13.5 billion a year industry; generics make up $4.5 billion of that pie. But the generic space is growing rapidly, growing more than 30% a year for the past 3 years.”
That adds up to big potential for IGI as it not only strengthens its Novasome line but branches out into generic topic treatments based on other companies’ chemical formulas to supplement its growth.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not hold a position in any of the aforementioned securities.