ETF Update: Prospects For Medical Device Companies

The failing economy has hit stocks in industries that many thought to be recession resistant, like the medical device makers.  Even Medtronic, Inc. (MDT), the leader in the group, signaled lower revenue and earnings estimates.

We identify interesting stocks and sectors through the use of our proprietary software.  It considers recent Trends, the stock’s Cycle, and adds a bit of Anticipation.  Since we use it to spot promising ETF’s, we call it the TCA-ETF model.

A Bottom for Medical Device Stocks?

Our sector ETF universe includes the iShares Dow Jones U.S. Medical Devices Index Fund (IHI).  The fund holds 41 securities.  The top ten make up 57% of the weight, so diversification is pretty good.  While the beta is only 1.05, the P/E ratio is over 25.  These are stocks where earnings growth is necessary to justify the prices.

The chart below gives the picture behind our TCA-ETF rating.

You can see the sharp decline in value last fall, along with the rest of the market.  There is a recent slight uptrend after a period of base-building, a pattern that the model often favors.

Other Viewpoints

Jordan Kahn at In the Money, one of our featured sites, has a trading position in IHI.  Last week he noted that the sector continued to look positive.

IHI also got a mention late last month from ETF Trends.  Max Chen cites fundamental research from Sageworks showing an increase in the home health care market, attributed to the aging baby boomers.

There is also the possibility that the sector is enjoying the Obama effect, something suggested last November by Gary Gordon.

Other Health Care Sectors

We should note that the model also has buy ratings on three other health-related sectors:  IHF, IBB, and IYH.  In our weekly reports we try to feature a group that we have not discussed recently.  It is often not the top-rated sector, as one can see from the weekly rankings.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, February 5th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. During the last week we gained about 1.5%, while the market was up about 5%.  The model does not try to “guess bottoms” or whether a perceived trading range is going to hold up.  It does well — very well — when there is a break leading to a sustained move.  We respect the negative signals, which helped us avoid major losses in this program last fall.

Because of the current ratings, we are moving to a neutral stance in the Ticker Sense Blogger Sentiment poll. While only seven of our fifty-seven sectors are in the “buy” range, there are others that are quite close.  We have already sold one of the three inverse ETF’s and another is about to exit the top five.  As we have noted in recent weeks, the situation depends very much on political events.  It continues to be a time of uncertainty.

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