Why I’d buy these 2 rising health stocks

These two stocks appear to have long-term growth potential.

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Shares of Kromek (LSE: KMK) have enjoyed a strong run this year, rising from 22.5p to a recent high of 36p. The company today released its results for its financial year ended 30 April and with the shares down 8.6% on yesterday’s close, this is a stock that is interesting me at a current price of 33p.

Ramping up revenues

Kromek is a radiation detection technology company focused on the medical, security screening and nuclear markets. It said 2016/17 was “another year of good progress and ramp-up in commercial activities with revenue growth driven by higher product sales across [its] three key target markets.”

Revenue for the year increased 7.5% to £9m but 2017/18 will see a step change as revenue comes through on large-scale contracts that have been secured over the last 24 months. Management said: “The group expects to report year-on-year revenue growth of approximately 40%, in line with market expectations.” So we’re looking at about £12.6m.

Kromek isn’t currently profitable, reporting a £3.1m bottom-line loss today, having expensed £3.5m of research costs for products and platforms that it said are “linked to existing contract deliverables and significant future revenue opportunities.”

The company had cash of more than £20m on its balance sheet at year-end (thanks to a fundraising in January) and has a good number of institutional investors on its shareholder register. While the cash pile means I’m unconcerned by Kromek’s current lossmaking status, it also means I have to value it on revenue rather than profit at this stage.

Valuation

At the current share price of 33p, the market capitalisation is £85m, so the stock trades at 6.8 times next year’s guided revenue of £12.6m. This looks an enticing multiple to me for an early-growth business, whose advanced patent-protected technologies are gaining increasing traction in the attractive medical, security screening and nuclear markets.

The shares appear very buyable to my eye, although as a higher-risk investment this is a stock I would only take a small stake in at this stage of its development.

Demographics growth driver

ConvaTec (LSE: CTEC) is another stock in the health sector I’ve got my eye on. This FTSE 100 firm is a lower-risk proposition than Kromek but, like the small-cap, its share price has fallen back somewhat after a strong run. ConvaTec’s shares climbed from 234p at the start of the year to a high of 344p but are currently trading at 327p.

In a Q1 trading update released last month, the company reported revenue growth in its Advanced Wound Care and Ostomy Care divisions of 4.2% and 3.3% respectively. It saw flat revenue in Continence & Critical Care (due to margin improvement measures) and a 3.1% decline in Infusion Devices division (due to anticipated customer inventory reductions). But management reaffirmed its previous guidance for 2017 of group organic revenue growth in excess of 4% at constant currency.

On the back of this, the City consensus is for ConvaTec to deliver earnings per share of $0.20 (15.6p), giving a price-to-earnings ratio of 21. This is not a premium rating by the sector standards and with demographics providing a long-term driver for growth, the shares appear to be an attractive buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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