Healthcare is a huge space, and for every Medtronic (NYSE:MDT) or Pfizer (NYSE:PFE), there are dozens of quality names that go unnoticed by the investing public. A little time and effort, though, can uncover some intriguing names that may deserve a place in investors' portfolios. Today we highlight three ideas.

ICU Medical - There is Nothing Dull About Cash
ICU Medical (Nasdaq:ICUI) is a classic example of a company that does nothing exciting, except churn out impressive amounts of cash. ICUI is makes small, inexpensive, disposable medical devices, with a major focus on infection prevention products (IV connectors, in particular), custom medical tubing and critical care.

The growth here is not eye-popping, but the company's return on capital has averaged more than 10% for the last five years, and the company converts more than 10% of its sales to free cash flow. Management is more than happy to return that cash to shareholders in the form of share repurchases.

There are a few drawbacks here for potential investors. The company reduced its reliance on Hospira (NYSE:HSP) by buying its critical care business, but this was definitely a "scratch and dent" purchase that will require a lot of work to turn around. Second, the company does not invest much in R&D, which raises the question of whether it can fuel future growth. Third, the company does compete with some sizable players like Baxter (NYSE:BAX) and CareFusion (NYSE:CFN), but where those two companies see the overlapping products as just a few out of thousands, ICUI is completely focused on them.

IRIS International - A Diagnostics Idea that Could Bloom
IRIS International (Nasdaq:IRIS) is the sort of stock that can drive an owner a little batty. The company has an excellent product (an automated urine microscopy analyzer), a great business model, intriguing technology and a very promising pipeline. It has also been beset by delays and disappointments, and the result is a stock chart that resembles a mountain range.

The good news is that IRIS does not have any problems that a little discipline and a better economy cannot solve. A better economy will give hospitals the money to invest in automation for their clinical labs (a critical need nowadays), while better discipline and execution on product development and regulatory filings will help ease investors' concerns about future performance. (For more, see Investing In Medical Equipment Companies.)

The hook for IRIS is threefold: The U.S. market for its primary product is only 50% penetrated, and the company has the dominant share in the U.S. (and only one competitor). Second, the company hopes to launch a new molecular diagnostics test for prostate cancer that could be worth tens of millions of high-margin revenue. Last and not least, the company has a proprietary imaging technology, called 3GEMS, which could not only support the next generation of automated urine microscopy analyzers, but also an entry into the $2 billion hematology market.

Luminex - A Fighting Chance at the Next Big Thing
Luminex (Nasdaq:LMNX) is likely to be the biggest risk-reward tradeoff of these three ideas. Luminex has developed a technology (called xMAP) that allows scientists and clinicians to quickly test a large number of samples for multiple biological targets. The applications for this technology are numerous, and range across clinical diagnostics and basic biological research. All in all, Luminex's technology touches markets worth about $3 billion today, and that number is likely to keep growing.

Luminex is also pursuing a pretty unusual model. The company is focusing its efforts on developing its technology, manufacturing the systems and disposables and producing a limited number of diagnostic tests. Simultaneously, the company has struck licensing agreements with dozens of major healthcare and life science companies (like Abbott Labs (NYSE:ABT)) to develop and market additional products using this technology. This model is not unlike the Microsoft approach, and it allows for the introduction of a far greater number of assays and tests using Luminex technology than the company could develop on its own.

Of course there are risks here. Luminex competes with major competitors like Illumina (Nasdaq:ILMN), Life Technologies (Nasdaq:LIFE), and Gen-Probe (Nasdaq:GPRO). What's more, these are early days, and the company has seen a lot of lumpiness in its orders, and the partnership model limits the company's visibility. Still, it is not every day that you find a company below $1 billion in market cap that may have a new platform technology for large and growing markets like biological research and clinical diagnostics. (For more on this topic, check out A Checklist For Successful Medical Technology Investment.)

The Bottom Line
Med-tech has often been a sweet spot for many investors. It is the closest thing to a perpetually-growing market that an investor can find, and a little bit of due diligence can take you a long way.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing

    Don't Freak Out Over Black Swans; Be Prepared

    Could 2016 be a big year for black swans? Who knows? Here's what black swans are, how they can devastate the unprepared, and how the prepared can emerge unscathed.
  4. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  5. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  6. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  7. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  8. Stock Analysis

    Analyzing Sirius XM's Return on Equity (ROE) (SIRI)

    Learn more about the Sirius XM's overall 2015 performance, return on equity performance and future predictions for the company's ROE in 2016 and beyond.
  9. Budgeting

    5 Alternatives to Traditional Health Insurance

    Discover five of the most popular alternatives to traditional health insurance plans, alternatives that are increasingly popular as health insurance costs rise.
  10. Stock Analysis

    Will Virtusa Corporation's Stock Keep Chugging in 2016? (VRTU)

    Read a thorough review and analysis of Virtusa Corporation's stock looking to project how well the stock is likely to perform for investors in 2016.
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  3. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  4. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  5. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  6. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
Trading Center