Key medical-device stocks a picture of health
What the share-price charts say about Cochlear, ResMed, Fisher & Paykel and Sirtex.
The S&P/ASX 200 healthcare sector index reached record highs in June, continuing an incredible run since the GFC lows. The index has now tripled in value.
Healthcare covers a large variety of companies and this month I am looking at a specific part of the index – medical device makers.
There’s the Australian success story Cochlear, sleep apnoea device makers ResMed and Fisher & Paykel Healthcare, and the relative newcomer Sirtex.
These stocks have been covered well by the traditional analysts and the big brokers, but if you are serious about investing in these companies, adding another layer of analysis in the form of charting, and pinpointing your entry and exit levels, will help to achieve better outcomes.
(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this article).
Cochlear manufactures and distributes hearing implants. Everyone has heard of them and the company distributes its products all over the world. It has grown substantially over the years and is now valued at nearly $9 billion.
Cochlear has been an interesting stock to trade in the past few years because it has displayed some textbook charting patterns. Across 2013 to 2014 Cochlear eased back in a shallow manner then started rising again.
This rounded low is a bullish sign and a good indication that a bottom has been put in place. It can also be referred to as a “cup and handle” formation.
In 2015, we saw Cochlear track sideways in a triangular formation. This is known as a “continuation pattern” and is a sign that the stock is getting ready to resume its trend.
After breaking out of that towards the end of the year, Cochlear did indeed resume the uptrend, rallying through $100 and onwards to above $150. Now, it is easing back but if it can sit on top of the 2016 high near $145, Cochlear could launch into another strong rally and go to a new high for the year. Otherwise we can see some trendline support coming in near $135.
ResMed develops and manufactures products that treat and manage respiratory disorders such as sleep apnoea. It is a $13-billion company that is also listed on the New York Stock Exchange.
The past few years have been a wild ride for the ResMed share price. Early 2015 saw the shares rally significantly from about $7 to nearly $10. They fell back to $7 due to some poor quarterly financial results and the announcement that a Phase III trial of a sleep apnoea therapy was a failure. The shares eventually recovered and have this year hit an all-time high.
When a stock suffers a dramatic fall, like ResMed did in 2015, then that price point preceding the fall can become a level of strong resistance. ResMed has managed to pass that peak in 2015, but the past few weeks has seen some selling.
To be confident that ResMed can keep moving higher, we need to see some buying return in this $9.80 region. If that cannot occur, it is likely to drift back towards support near $8.
Fisher & Paykel Healthcare (FPH)
Fisher & Paykel Healthcare is based in New Zealand. The company started out making whitegoods in the 1930s and diversified into healthcare products in the 1960s. Eventually the two different sectors split into the whitegoods and healthcare companies that still share the same name.
Fisher & Paykel Healthcare has been listed since 2001 and is solely focused on the design and manufacture of respiratory care products. The shares have had a great run over the past few years but I can see some danger signs.
First, since peaking in June, Fisher & Paykel Healthcare has been sold down quickly. The volume has also been healthy on the way down, which means there is some strength in the selling. The other point to note is the volume during the last rally that started at the beginning of this year, was fairly light. This means a lack of conviction in the buying.
All this tells me that if the selling continues in Fisher & Paykel Healthcare, it won’t take much for the price to crumble and we could see it back where it started the year near $8.
If you thought ResMed has had a wild ride recently, it is nothing compared to that of Sirtex.
In the past five years, the stock has traded at $5, become a market darling and almost hit $40. Unfortunately, it then tumbled to $15, rallied above $40, and is now languishing near $15 again.
Sirtex provides treatments for liver cancer. The market has been excited about Sirtex because its dosage sales represent such a small part of the market, which means there could be a lot of upside potential if it can capture greater parts of the available market for its products.
However, it is this optimism that led to a collapse last year in the share price, because sales growth was lower than expected. This is following on from a collapse the previous year when a clinical study into the effectiveness of combining Sirtex’s microspheres with chemotherapy failed to show a significant improvement in survival.
The price action during the past few years makes the Sirtex chart a hard one to read, although at this point it does look a little more positive than negative. Often a stock will make a move in five waves and it looks like Sirtex did that during 2016.
That is, it fell initially for the first wave, then bounced (wave 2), fell again (wave 3), had another bounce (wave 4), before making a low in May this year to complete the fifth wave.
This analysis is known as Elliott Wave and suggests the recent low in Sirtex could hold for many months from here. Where it can bounce to is anyone’s guess for now. However, what we can say is that if the stock will go higher here, then it will start hitting some strong resistance between $22 and $26.
About the author
Michael Gable is managing director of Fairmont Equities. He helps his clients achieve higher returns from share portfolios by combining both fundamental and technical analysis. Michael is also a media commentator who regularly contributes to Sky News Business, the Australian Financial Review, and online investing sites. Visit here for free stock picks and a trading guide, and to apply for a free portfolio review. Follow: @FairmontEquAU
Michael Gable is managing director of Fairmont Equities. He helps his clients achieve higher returns from share portfolios by combining both fundamental and technical analysis. Michael is also a media commentator who regularly contributes to Sky News Business, the Australian Financial Review, and online investing sites. Visit here for free stock picks and a trading guide, and to apply for a free portfolio review.
ASX Charting Library explains a range of charting terms and concepts.