Four offerings deemed to be right for right now.
Exchange-Traded Fund: iShares Dow Jones US Medical Devices
Medical devices typically work on a faster product cycle than pharmaceuticals, keeping a steadier stream of innovative products. Thus very few of these firms face the patent losses that currently threaten profitability at the largest pharmaceutical companies. Furthermore, cost controls from U.S. health insurance reform legislation will likely not have much effect on revenues or profits at medical-device companies. Their customers are individual doctors and hospitals rather than the major distributors who buy pharmaceuticals, giving device companies greater pricing power due to their disaggregated purchasers. Also, the faster innovation cycle demands that each product update proves its cost-effectiveness to a degree that government procurers almost always find satisfactory. While pharma companies charge lower prices in other developed countries due to the bargaining power of government drug purchases, medical devices tend to command roughly the same prices worldwide.
The demand picture looks bright for these firms: An aging population demands more joint replacements and cardiovascular operations, continued innovation in diagnostic instruments creates whole new markets, and emerging economies trading up to Western best practices in medicine should provide a nice tail wind for years to come. (Bradley Kay)
Stock: Becton, Dickinson
Becton made a name for itself manufacturing basic surgical instruments: needles, syringes, and scalpels, among others. As the industry evolved, so did the company's products, with many significant technological innovations first introduced at Becton. The launch of safety-engineered products designed to prevent needle-stick injuries is among the firm's latest achievements; these products are now mandatory in most hospitals across the United States. Becton has also been advocating greater use of safety products overseas, and its push is paying off: The firm is seeing switching from traditional to safety-guarded sharps. This trend is particularly evident in developing countries, where the prevalence of infectious diseases makes Becton's single-use, safety-engineered needles and syringes valuable to both nurses and patients.
Our favorable take on Becton's prospects also stems from our confidence in the firm's management. Becton has a history of allocating its capital wisely and providing shareholders with solid returns on investment. The company's reputation for searching out pockets of growth, along with its sizable manufacturing and distribution infrastructure, convinces us that Becton will be able to fend off competition and continue to defend and widen its economic moat. (Haywood Kelly)
Separate Account: Champlain Small Cap Equity
This small-growth separate account does it all. It has generated topnotch long-term returns with below-average volatility. Manager Scott Brayman and team built a great record at Sentinel Small Company
Brayman and his team focus on a limited set of sectors they know best. They emphasize consistent and predictable growers with strong niche businesses over speculative fare. Take top-five holding Waste Connections
Mutual Fund: CGM Focus
This super-aggressive fund is down, not out. Manager Ken Heebner is several notches above bold. He trades rapidly, runs a concentrated portfolio, make big sector bets, and, at times, shorts stocks. That has given the fund a Jekyll-and-Hyde risk/reward profile. Right now, Mr. Hyde has the upper hand.
The fund is flat so far in 2009 after shedding nearly half its value in 2008 and is being left in the dust by its rivals. But Heebner has hit the mark considerably more often than not over time. So despite the fund's recent stint of gross underperformance it still has the best long-term returns in its category. This hyper-aggressive fund isn't for everyone and should only be used to fill a small, speculative slot in a portfolio. But history shows Heebner delivers in spades over time. Making a small investment in the fund when it's deep in a periodic trough makes more sense than chasing into it after one of its giant, near-term gains. (Michael Breen)