In this article, we will be taking a look at 8 most promising medical stocks according to hedge funds.
Growth and Innovation in the Global Medical Devices Sector
The healthcare sector depends on medical technology advancements, particularly devices used in disease prevention, diagnosis, and treatment. Unlike pharmaceuticals, medical devices work through physical or mechanical means rather than chemical processes. Key products include pacemakers, imaging equipment, dialysis machines, and implants.
Like many other industries, the medical device industry was greatly affected by the start of the COVID-19 pandemic. Interestingly, the In Vitro Diagnostics (IVD) segment saw significant revenue growth in 2020 and 2021, mostly due to the increased demand for PCR and fast testing. Overall, even while funding for digital health had been rising gradually in the years preceding the pandemic, it saw a notable uptick in 2021, hitting around $45 billion, more than all of the funds amassed between 2010 and 2017.
The global market for medical devices, estimated to be worth $570 billion in 2022, is expected to increase at a compound annual growth rate (CAGR) of 5.8% from 2023 to 2032, reaching over $996.93 billion. By 2032, the U.S. market is expected to have grown to a value of around $246.51 billion, with a compound annual growth rate (CAGR) of 5.6%. Key drivers propelling the medical devices market’s expansion in the upcoming years are the rise in demand for cutting-edge treatments and continuous technical developments in medical devices to meet unmet demands in the healthcare industry.
The importance of the medical devices sector, which employed over 329,000 people and generated $25.8 billion in payroll in 2020, is highlighted by the U.S. Cluster Mapping Tool. The 2023 EY Medical Technology study highlights supply chain management and financing as two important topics for Medtech leaders worldwide. In 2022, R&D expenditure returned to historical norms, despite reaching a record $24.7 billion. A significant drop in mergers and acquisitions is also noted in the report which indicates a diminished emphasis on inorganic growth tactics.
Artificial intelligence (AI) and other technologies have revolutionized patient monitoring, diagnosis, and treatment in the healthcare industry. Applications of AI include predicting results using electronic health information and evaluating radiological images for early detection. One noteworthy instance was when NVIDIA Corporation and Medtronic announced in March 2023 that they would be integrating NVIDIA’s AI technology into Medtronic’s FDA-approved GI Genius, an intelligent endoscopic module that helps detect precancerous growths.
Also Read 10 Best Healthcare Stocks to Buy According to Hedge Funds and 10 Best Mid-Cap Healthcare Stocks to Buy Now.
A closeup shot of a laboratory technician handling a medical device used for fertility treatments.
Our Methodology
For our methodology, we began by filtering medical stocks from healthcare equipment ETFs. Next, we identified those with the highest number of hedge fund holders as of Q2 2024, using data from the Insider Monkey database. The final selection was ranked based on the number of hedge fund holders to prioritize stocks with greater institutional interest.
“Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).”
Here is our list of the 8 most promising medical stocks according to hedge funds.
8. Lantheus Holdings, Inc. (NASDAQ:LNTH)
Number of Hedge Fund Holders: 34
Lantheus Holdings, Inc. (NASDAQ:LNTH) is a leading radiopharmaceutical company that develops, manufactures, and commercializes diagnostic and therapeutic products for medical imaging. Their advanced imaging agents and technologies assist doctors in detecting, treating, and monitoring diseases, with a focus on cardiology and oncology.
In Q2 2024, Lantheus Holdings Inc. reported a 22.5% year-over-year revenue growth. This was largely driven by Radiopharmaceutical Oncology, which grew 29.3%, due to the continued strength of PYLARIFY, whose sales increased by 30% due to rising awareness and adoption. Precision diagnostics revenue rose by 14.9%, with DEFINITY sales up 10.7% and TechneLite revenue jumping 30.5%, driven by strong market demand.
However, strategic partnerships and other revenue declined by 31.7%, mainly due to the absence of $7 million in RELISTOR-related royalties from the previous year. Despite this, strong contributions from MK-6240 and advancements in patient care and research partnerships helped maintain overall company momentum by mid-2024.
Lantheus Holdings, Inc. (NASDAQ:LNTH) is focused on advancing treatments for Alzheimer’s disease and prostate cancer. It acquired diagnostic tools NAV-4694 and MK-6240 for early Alzheimer’s detection and secured global rights to RM2, a tool for diagnosing early-stage prostate cancer. The company also licensed two promising drug candidates from Radiopharm Theranostics.
Lantheus has delivered a remarkable 306% return over three years, driven by strong financial performance, including its recent transition to earnings per share of $1.80 in Q2 2024. This growth, along with the company’s positive momentum, positions it as a promising investment opportunity.
ClearBridge Small Cap Value Strategy stated the following regarding Lantheus Holdings, Inc. (NASDAQ:LNTH) in its Q2 2024 investor letter:
“Health care results lifted relative performance during the period and included our top two individual performers in Lantheus and newer portfolio addition Corcept Therapeutics. Lantheus Holdings, Inc. (NASDAQ:LNTH), which makes diagnostic and therapeutic products that help clinicians diagnose and treat heart, cancer, and other diseases, saw its share price rise on strong first-quarter results.”
7. Masimo Corporation (NASDAQ:MASI)
Number of Hedge Fund Holders: 35
Masimo Corporation (NASDAQ:MASI) is a global medical technology company specializing in noninvasive patient monitoring technologies. It develops and manufactures monitoring devices, sensors, and patient monitors used in healthcare settings worldwide. The company’s main goal is to improve patient outcomes and reduce healthcare costs through its advanced monitoring solutions.
Masimo’s flagship product is its Signal Extraction Technology (SET) pulse oximetry, which provides accurate measurements of blood oxygen saturation even in challenging conditions where traditional pulse oximeters may fail.
Masimo Corporation (NASDAQ:MASI) benefits from both growth and recurring revenue by selling sensor housings (by expanding the customer base for them) and sensors. Masimo is also opening a new plant in Malaysia to leverage economies of scale. Additionally, it halted sales of Apple’s latest Apple Watch due to patent disputes, and if Masimo launches its medical monitoring watch, the stock could see further gains. In September, its stock rose by 19% after management changes, and the planned spin-off of its consumer business could boost investor sentiment.
Masimo Corporation (NASDAQ:MASI)’s management shared details about cost control during the Q2 2024 earnings call:
“For the second quarter, our consolidated non-GAAP gross margin was 54%, which included gross margins of 62.5% for healthcare and 35% for non-healthcare. Healthcare gross margins improved 240 basis points year over year and rose 20 basis points sequentially, which is attributable to the relocation of sensor manufacturing to Malaysia combined with increased operational efficiencies and a favorable mixed benefit from higher consumable sales.
Our progress on this front gives us confidence in achieving our long-term goal of 30% operating margins for the healthcare business in five years. For our consolidated business, non-GAAP operating profit was $73 million. Our operating margin of 15% improved sequentially from the first quarter but declined modestly versus last year due to the return of performance-based compensation to normalized levels in 2024. Excluding the impact of performance-based compensation, our operating expenses decreased 4% versus the prior year period due to cost reduction initiatives. Even with the return of performance-based compensation, we delivered 13% earnings growth to achieve non-GAAP earnings per share of $0.86 for the second quarter.”