High-Ranking Medical Device Stock Set to Deliver Big Gains

Jim Woods's picture

Wednesday, December 3, 2014 - 7:30am

by Jim Woods

Despite the incredible, often life-saving benefits of medical devices such as pacemakers, stents, catheters, implants, etc., the companies who manufacture them have a big tax bull's-eye on their backs courtesy of Obamacare.

The Affordable Care Act (ACA) has a provision in it called the medical device tax, which is a 2.3% excise tax on a wide variety of medical devices, including most of the products sold by one of the biggest, and in my view, best, companies in the space: Medtronic (NYSE: MDT).

Fortunately for Medtronic, and partially because of the industry's aggressive lobbying, the medical device tax could soon be erased from Obamacare. That's because, in a rare display of bipartisanship in Congress, lawmakers from both sides of the political aisle want to repeal the tax.

In fact, a recent Washington Post article called the repeal "one of Washington's top priorities" and actually mentioned Medtronic by name, as the Minnesota-based company has its two Democrat senators, Al Franken and Amy Klobuchar, on record supporting it.

The repeal is almost certainly going to become an even higher priority item when the Republican controlled Congress is sworn in in January.

For Medtronic, a repeal of the medical device tax represents one of the many reasons why this stock is a great play.

Medtronic is also moving forward with its plan to buy rival Covidien (NYSE: COV). The vote on the acquisition is expected to take place at a shareholder meeting in January. Covidien is based in Ireland, and a reincorporation could result in lower taxes.

Last month, Medtronic reported strong fiscal second-quarter results. Revenue was up 5% year over year to $4.4 billion. Non-GAAP diluted EPS also grew 5% to $0.96. Both metrics were in line with consensus estimates. 

Finally, the company has consistently increased its annual dividend for more than a decade and currently yields 1.6%. 

But my favorite thing about Medtronic has to do with its price performance. 

MDT Chart

The strong price action, particularly since its mid-October low, has resulted in a series of new all-time highs. But what really has me excited about MDT is its outstanding relative strength (RS).

Relative strength is one of the most effective and reliable technical indicators available to traders. It ranks a stock's performance relative to all other stocks in the market. Specifically, it assigns a numerical score from 0 to 100 to a stock based on its performance over a certain period of time, typically six months.

Over the past six months, MDT is up 22% compared with 7.5% for the broader market. This gives it a RS rank of 86, meaning it has outperformed 86% of the stocks in the entire universe of publicly traded U.S. companies.

Seasoned traders know relative strength is a great tool to help identify winning stocks likely to continue outperforming the market. Its efficacy has even been proven by Nobel laureates.

One of the reasons why this tool likely works so well is because of Wall Street's "follow the leader" mentality. When the smart money moves into a stock, the share price begins to climb. When the share price climbs, more money follows, and that results in greater and greater gains. 

These gains tend to last until something material changes in either the money flow, the company's underlying fundamentals, or some other exogenous circumstance sends buyers running for the exits.  

In the case of Medtronic, the smart money is likely to keep flowing into the stock, especially as the chance of a repeal of the medical device tax grows. 

I think traders should take a good look at MDT before the next wave of buying sends its RS rank -- and shares -- even higher. 

In case you couldn't tell, RS is hands down my favorite technical indicator. But it only applies to price action, and the best investments are sound technically and fundamentally. That's what led to the development of a little-known indicator called the Alpha Score.

The Alpha Score combines a stock's RS rank with a relative strength rating of one of the most reliable fundamental measures of the health of a company. When taken together, they highlight some of the best buys on the market.

In fact, the Alpha Score spotted eight of 2014's biggest winners and delivered gains as high as 266%. If you want to learn more about this powerful indicator, plus get the name of a stock it just signaled as a "buy," follow this link.

This article originally appeared on ProfitableTrading.com: High-Ranking Medical Device Stock Set to Deliver Big Gains​

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.