Medical Equipment Stocks Are Ready to Break Out

Medical Equipment Stocks Are Ready to Break Out

Health care has been a leader in this bull market for more than four years as the pharmaceutical, biotechnology and health-care provider sectors have vied for leadership roles. But late last year, medical equipment stocks finally started to pull their weight and outperformed the broad market.

Peaking in March, this subsector formed an orderly corrective pattern called a flag, so named for resembling a flag flying on a pole (see Chart 1). In a rising trend, this is often a pause before the resumption of the rally.

If and when the price moves above the upper border of the flag, the bulls claim victory and another leg higher usually follows.

Within the sector, we can already see a breakout in C.R. Bard (ticker: BCR ), a maker of medical, surgical and diagnostic devices (see Chart 2). Monday, when the broad market rebounded from the prior Friday’s big selloff, Bard made a clean break higher from its flag pattern. However, the past two days have seen small price movements and low volume, so it would not be a surprise to see this trade lower to test its breakout before heading higher.

A test is simply a dip to entice bulls who missed the initial breakout to buy. If they do, demand swells and prices resume climbing.

Teleflex ( TFX ), a provider of medical devices for critical care, urology and surgery, has a similar pattern although rather than a flag it is now trading in a rectangle pattern (see Chart 3). A flag is merely a rectangle that is sloped lower. The difference in meaning is very subtle, but the trigger that brings the bulls back is the same – a move above the pattern’s upper border.

Last week, the stock bounced off its rising 50-day trendline. And within the pattern it is spending more time near resistance rather than support, which is a sign of internal strength.

More advanced chart watchers will note that stochastics, an indicator that measures overbought and oversold within a trading range, agree. We normally think of an oversold reading being below 20-25 in a range of 0-100. However, for strong stocks, stochastics usually bottom at 35-40. That is what we see here.

For investors preferring to buy lower within a stock’s 52-week range, a good candidate would be Baxter International ( BAX ), which focuses on products dealing with hemophilia and other chronic and acute medical conditions.

Baxter has had a rough ride for the past two years, lagging the market and making little headway. But earlier this month it moved above a short-term trendline and its 50-day moving average (see Chart 4). It still has to deal with some headwinds but seems to be in much improved shape. Further, it is one of the few stocks in its group with a good dividend yield at 2.9%

We cannot say it is off to the races, but it is poised to make an attempt to catch up with its peers.

Health care in general has been a leader for several years, and it shows no signs of stepping down now. The medical supplies’ subsector is a newcomer to the leadership ranks and that bodes well.

This article was originally published on Barron's.