2 Deutsche Bank Health Care Focus Stocks Have Big Upside Potential

By Lee Jackson Published Sep 30, 9:10AM EDT

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If any arena has taken a beating for no real reason, it is all of the subsectors of the medical arena. Whether it is drugs or devices, populist political chatter from candidates vowing to get tough has led many investors to flee to the exits. A new report from Deutsche Bank makes the case that the selling is way overdone, and the proverbial baby is being tossed out with the bath water.

Deutsche Bank points out that since the end of July the S&P 500 Healthcare Index is down a whopping 16%, versus 11% for the S&P 500. The report highlights companies to buy that have been hit hard despite delivering solid earnings in the first half of the year. The analysts have two focus stocks to buy that offer substantial upside: Abbott Laboratories (NYSE: ABT) and Medtronic PLC (NYSE: MDT).

Abbott Labs

Abbott Laboratories is a leading diversified global health care company that develops, manufactures and markets branded generics, medical devices, nutritional products and diagnostic solutions. The company recently agreed to acquire the equity in Minnesota-based Tendyne Holdings that it does not already own for $250 million plus future payments tied to regulatory milestones. Many analysts on Wall Street have applauded the purchase and the way the company is putting its substantial balance sheet to work.

The company also offers a diversified large cap play, as earnings are split between five well-positioned business segments: Nutritionals (31.0% of revenues), Vascular (13.0%), Generic Pharmaceuticals (20.0%) and Diagnostics (25.5%) and Diabetes (10.5%).

Abbott Labs investors are paid a 2.42% dividend. The Deutsche Bank price target for the stock drops from $57 to $53, and the Thomson/First Call consensus target is $54.41. Shares closed Tuesday at $39.50.

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Medtronic

Medtronic is now based in Ireland after the gigantic combination with Covidien. Many on Wall Street see this historical merger, probably one of the largest in the industry, as a momentous event, leading to the creation of a unique company that combines the extensive and innovative abilities of both Medtronic and Covidien. The combined company, with officially joint forces of over 85,000 employees present in more than 160 countries and annual revenues of $27.4 billion in 2014, will now expedite Medtronic’s three fundamental strategies of therapy innovation, globalization and economic value.

The Deutsche Bank team points out that the stock has been under pressure, first due to emerging markets concerns, then after earnings, which they believe the market misunderstood. The analysts note Medtronic had a strong quarter of top line growth driven by the pipeline that they believe can continue, maybe not at the same level every quarter going forward, but in a solid mid-single-digit range.

Furthermore, the company just announced a huge new restructuring move that is expected to free up $8.9 billion in cash, which can help pay down debt, buyback shares or maybe even help with a selective acquisition.

Medtronic investors are paid a 2.25% dividend. The Deutsche Bank price target is $90, the consensus target is lower at $86.24. Shares closed Tuesday at $66.37.

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It is one thing for small-cap biotech stocks to get mauled in a risk-off atmosphere. It is quite another when established large cap companies get crushed. Growth investors looking to add health care positions would be well served buying these two top Deutsche Bank recommendations.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.