Biotech stocks get a lot of attention for their high-flying valuations, getting a boost from demographic trends that favor companies that make materials to treat cancer, heart disease and other ailments.
One stock that could be poised for a run-up is LeMaitre Vascular (LMAT) , a Burlington, Mass., maker of balloon catheters, carotid shunts, patches and other devices used in surgery on veins and arteries. This is a growing field, with vascular disease affecting some 20 million people worldwide.
The company was founded by Dr. George LeMaitre in 1983 and debuted as a public company in 2006. In March, LeMaitre acquired the graft-maker ProCol Vascular Bioprosthesis, one of more than a dozen acquisitions the company has made over the years. LMAT is considered a small-cap stock, with a market capitalization of $366 million.
It has a clinical trial set to start in China, where it recently opened an office, in the second half of this year, and it has nearly tripled its sales force over the last decade.
Sales this year are projected to increase 13%, and operating income 38%, to $15.9 million. In the second quarter, the company announced record sales of $22.4 million, up 13%. It has more than $29 million in cash and its second-quarter earnings per share of 14 cents were up 40%. The company has said its goal is to reach 10% annual sales growth and 20% annual profit growth.
The stock scores highly on the model that tracks the strategy of guru Martin Zweig, a growth-oriented investor who wrote the book Winning on Wall Street. He looks for stocks of companies where quarterly earnings are growing at a faster rate than they were a year earlier, in the previous three linked quarters and over the last three years.
LeMaitre passes Zweig's criteria, with the EPS growth rate for the current quarter, 40%, greater than the long-term historical growth rate of 24.7%, based on the average of the three-, four- and five-year growth rates.
My strategy following the principles of noted investor Peter Lynch also likes LeMaitre's earnings growth trends, which show a solid but not-too-fast upward climb. Lynch looks for stocks where EPS growth is in the range of 20% to 50%, with anything over 50% potentially unsustainable. LeMaitre's EPS growth rate of 24.7% fits nicely in the strategy's sweet spot.
The downside: LeMaitre shares trade at a premium multiple to the market and have a price-to-earnings ratio of about 40. Investors are paying up for the growth and opportunity, but the valuation is not cheap. And as a small-cap biotech stock, it is riskier and can be more vulnerable to market volatility.