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Buy MedTech names due to improving fundamentals and a favorable FDA environment, Barclays says in sector initiation

Key Points
  • Barclays analyst Kristen Stewart initiated coverage on the MedTech space with a “positive view.”
  • In a note to clients on Tuesday she wrote that “fundamentals have improved” and that “innovation trends continue to improve thanks in part due to a more favorable FDA environment.”
  • Her top picks in the space include Abbott Labs, Boston Scientific, Medtronic and Stryker, all of which she gave overweight ratings.
  • Virtus Investment Partners’ Joe Terranova owns Abbott and believes that expansion in emerging markets will continue to drive gains. Nuveen’s Stephanie Link, on the other hand, sold her position in Abbott and used the gains to buy competitor Zimmer Biomet.

Now is the time to buy MedTech names because positive fundamentals and a favorable regulatory backdrop will continue to drive gains, Barclays analyst Kristen Stewart wrote in a note to clients on Tuesday.

Stewart initiated coverage on the sector with a "positive view," noting that "innovation trends continue to improve thanks in part to a more favorable FDA environment" and that "the industry's structure (e.g. oligopolies) is favorable and conducive to profitable growth."

Her top picks in the space are Abbott Labs, Boston Scientific, Stryker, and Medtronic, all of which she initiated as "overweight." On the flip side, she rated Baxter, Edwards Lifesciences, and Zimmer Biomet "underweight" due to "greater earnings risk."

Barclays says to buy this name in medical tech

Stewart is bullish on Abbott Labs specifically because she believes the company's product pipeline and "favorable mix of businesses" can drive the stock to $80 -- a 12.76% jump from Tuesday's closing price of $70.95.

Some investors, however, believe there's better value elsewhere in the sector given Abbott's 24.3% rise year-to-date. Stephanie Link, managing director at Nuveen which has $970 billion in assets under management, recently sold her position in Abbott and used the profits to buy competitor Zimmer Biomet.

"I think this new management team at Zimmer has a lot of optionality," she said on Tuesday's "Halftime Report." "I think they're going to make some asset sales. I think they're going to fix the base business - they're already in the process - and this CEO is so highly regarded."

Zimmer is cheaper than Abbott at 16.2X forward earnings compared to 22.4X, and the stock is only up 5.8% year-to-date, through Tuesday's close, compared to Abbott's 24.3% gain.

Barclays' Stewart has an underweight rating on Zimmer since she believes the "transformation [is] likely to take significant time." While Link agrees that it's going to "take time to turn around," she believes the relative underperformance is an attractive entry point to buy the stock. "I just find more value in Zimmer. I'm not saying I don't like Abbott, I just think it [Abbott] has run its course," she said.

Virtus Investment Partners' Joe Terranova, on the other hand, owns Abbott Labs and is sticking with it since he believes the company's foothold in emerging markets will lead to continued gains.

"I still think Abbott is the place to be," he said on Tuesday's "Halftime Report." "I like the emerging market story. I like the pediatric nutrition business both in Latin America and greater China...I believe in the emerging consumer. I believe they're going to want this type of health care, and this is as good of a diversified health care company as you're going to find," he continued.

In medical devices Terranova also likes PerkinElmer. He had previously owned the stock, but sold his position after it hit an all-time high of $98.33 on October 1. Since then, however, it's fallen more than 9%. So Terranova took advantage of the pullback and bought the stock again on Tuesday since he believes it's a "great quality name."

Health care led all sectors in Q3 -- posting a 14.04% gain for its best quarterly performance since Q1 2013 -- as investors rotated away from some of the high-flying tech names and into more defensive plays. And with an increasing number of Street watchers warning this bull market could be in its final stages, Terranova believes the health care sector is a good bet for investors going forward.

"I think from a quality standpoint when you're looking at sustainable earnings this is definitely a sector [health care] that where we are in the cycle you want to have exposure to. And I don't think investors are nearly as exposed as they should be," he said.