Since the beginning of the global economic crisis, medical device stocks have fared slightly worse than the overall market, losing roughly 400 bps more than the S&P500 (-31%) since September 1, 2008, on a market weighted basis. We continue to recommend that investors focus on companies providing life-sustaining products. We believe these products will remain insulated from the longer-term effects of the current economic crisis because target patients will be unable to forego procedures. The initial slide in the market left many strong companies looking very attractive.

In the coming year, investors should allocate funds to companies with high earnings quality profiles. We recommend companies with the following characteristics:
* Size – (1) Larger companies will find it easier to survive any future liquidity issues and acquire new technologies at cents on the dollar. (2) Size also refers to the average ticket price per product the company sells. As hospitals cut their capital spending budgets, allocations for large ticket items will be deferred. Focus on companies producing smaller ticket items.
* Scope – (1) Companies providing life-sustaining products should remain insulated from the current economic crisis, as target patients are unable to forego procedures. (2) Companies that provide a broad assortment of products related to their primary market served will be better positioned to compete when large purchasing organizations consolidate suppliers.
* Strategy – Focus on companies that have historically grown organically. Avoid companies that have a long track record of ‘growth by acquisition’. These companies may find it difficult to fund growth (acquisitions), diminishing underlying growth. Additionally, the financial statements for these companies are often clouded by one-time charges, lowering their quality of earnings