Checking Vital Signs on Medical-Services Stocks

 | May 04, 2012 | 4:30 PM EDT
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One of the top-performing stocks I have been tracking in model portfolios this year is Anika Therapeutics (ANIK). Before Friday's first-quarter report, the stock had advanced nearly 70% year to date.

However, the maker of treatments for bone and cartilage and ailments gapped down Friday, as the company missed top- and bottom-line views.

Nonetheless, the stock was getting support at its 10-week average, a sign that some of the institutional owners were doing some dip-buying to add to existing positions at a lower price. Even with the sharp decline, the stock is still up about 47% year to date.

Even with the misses, Friday's results represented a whopping 600% year-over-year gain in earnings and a 22% gain on the top-line number. The 10-week support is encouraging, suggesting that after that strong run-up and a much-needed pullback, the stock could set up for further gains.

Yesterday, I wrote about medical-services companies whose stocks are showing leadership above key moving averages. But other sub-industries within the medical sector are also outperforming the majority of stocks in the market.

In Thursday's trade, small-cap Kensey Nash (KNSY) bolted 32% on news that the firm would be acquired by Dutch-based DSM. Kensey Nash makes regenerative products for orthopedic, sports medicine and other surgical applications. While that stock is no longer a viable trade candidate, merger-and-acquisition activity often brings positive attention to other companies in related lines of business.

Several other medical-products makers have shown good chart action in recent weeks, continuing to receive good moving-average support even as the market has trended lower.

Endologix (ELGX), which makes vein treatments, has been getting solid support along its 10-week moving average. Despite the solid chart action, I regard this as a speculative company, because of the lack of earnings thus far.

Of course, this is common in many medical and biotech companies, which are often research-and-development-intensive. These companies frequently put their revenue back into research, meaning that a fundamental analysis that you might do on, say, a retail or info tech company doesn't apply here.

Endologix has reported revenue growth between 22% and 41% in every quarter over the past two years. That indicates strong demand for its products.

The stock cleared a buy point of $14.87 on April 27, shortly after the major indices confirmed a new uptrend with heavy-volume price gains. However, new uptrends are always fragile, and with Friday's market action, it appears to have failed.

As of now, Endologix has fallen from its prior high of $15.29. It is getting support above its 50-day line, but it's in "falling knife" territory at the moment. In other words, until the stock begins to rebound above key moving averages, it is not in a proper buy range. In addition, general market weakness would preclude me from taking a position at this juncture.

This is a small company, with a market cap of just $824 million. It trades around 447,000 shares per day, on average. That's on the thin side, when put in context of the broader market. But for a small-cap name, that's decent liquidity.

As always, these smaller stocks can be more volatile than others, and that means extra caution is required when opening a position. The stock has a beta of 1.16, an indication of its volatility.

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