Medtech has long been a highly profitable area for investors. As the space has matured and grown more competitive, however, investors have had to become more cautious when picking stocks in this high-growth space.
Over the past five years, for instance, industry giants like Medtronic (MDT -1.37%) have lagged the broader markets from a capital appreciation standpoint due to headwinds emanating from legacy portfolios, while up-and-coming device makers such as the diabetes care company DexCom have yielded life-changing gains for shareholders.
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Armed with this background, I think the diabetes care specialist Insulet (PODD 0.79%) and the surgical device company Conmed (CNMD 0.93%) are poised to be medtech's two best performers in 2023. Here's why.
Insulet: A best-in-class insulin pump franchise
The diabetes care specialist Insulet has been a rare bright spot in the medtech stock space in 2022. While most medical device companies have taken a sizable haircut in 2022, Insulet's shares have raced higher by a healthy 14.5% this year.
Insulet's contrarian move has been powered by the U.S. launch of its next-generation insulin pump device, Omnipod 5. Omnipod 5 is a tubeless insulin pump that seamlessly integrates with DexCom's continuous glucose monitoring devices to form a so-called "artificial pancreas."
Omnipod 5's launch drove Insulet's U.S. pump sales higher by a noteworthy 42% in the third quarter of 2022, relative to the same period a year ago. Perhaps more importantly, though, Wall Street expects the diabetes specialist to continue to post stellar levels of top-line growth over the next several years, as Omnipod 5 takes market share away from competitors and helps to grow the insulin pump category as a whole.
In addition to Insulet's sizzling organic growth, some analysts have openly pondered the possibility of the company being acquired due to its best-in-class insulin pump franchise. The long and short of it is that Medtronic, or another struggling medtech giant, may simply decide to buy this innovative platform, instead of trying to play catch-up.
Now, the one downside with Insulet is that the company's shares are currently bumping up against Wall Street's fair value estimate at the time of this writing. That doesn't mean that the medtech company's stock won't climb even higher, but further appreciation will depend heavily on investor sentiment (rather than the company's fundamentals).
Conmed: A top value play
Conmed, a medtech company focusing primarily on surgical equipment and devices, has slowly morphed into a bona fide value play in 2022. Thanks to the negative impacts of COVID-19, the unfavorable macroeconomic environment, and a temporary disruption due to the implementation of new warehouse management software, the surgical medical device company's shares have plunged by a staggering 38% this year.
Conmed's management has taken definitive steps to move beyond these key headwinds, however. Over the course of 2022, for instance, the surgical medtech company acquired both In2Bones Global and Biorez.
Combined with an expected rebound in its core surgical procedure business, these two acquisitions are expected to help drive Conmed's top line higher by a noteworthy 9.5% in 2023. The net result is that Conmed's shares are presently trading at a meager 2.27 times 2023 projected sales. That's one of the lowest valuations within the entire medtech space right now.
What's the catch? A near-term rebound in this case will probably be dependent upon the broader market conditions in 2023. Value stocks, after all, have largely failed to land with nervous investors in this tough macroeconomic climate. That being said, Conmed does sport a fundamentally strong business, and these recent acquisitions will only add to its long-term value proposition.
