A TSX health-care stock with both price momentum and long-term upside

Buying stocks with near-term price momentum can lead to strong portfolio returns. In a study by Narasimhan Jagadeesh and Sheridan Titman (Journal of Finance, 1993), they found that stocks with strong returns over recent months tend to generate significant returns over the following three to 12 months.

Listed in the table are some top-performing Canadian stocks year-to-date with market capitalizations over $200-million and stock prices over $3 a share.

It is important to note that in order to determine if the positive price momentum will continue, investors must analyze company and industry fundamentals, as well as valuations. Below, we profile one top performer that appears to have the right ingredients for continued success.

CRH Medical Corp.

CRH is a Vancouver-based company that provides the medical community with products and services for the treatment of gastrointestinal diseases. The company has two key business segments: CRH Anesthesia Management and CRH O'Regan Systems. Management has been actively growing its anesthesia management business through acquisitions. The company's anesthetics business serves medical practitioners who perform colonoscopies and endoscopies. Last quarter, this business segment represented 78 per cent of total revenue. Its CRH O'Regan Systems division markets a single-use, disposable, soft suction device for hemorrhoid removal. These two markets are intertwined as it is estimated that up to 20 per cent of colonoscopy patients have hemorrhoids.

Below are a few of the company's strong attributes.

• Solid financials: This small-cap health-care stock, with a market cap of about $350-million, has top-line growth, high earnings before interest, taxes, depreciation and amortization (EBITDA) margins, as well as strong future organic and acquisition growth potential, particularly from the anesthesia-services business. In the second quarter, revenue increased to $10.9-million (U.S.) from $2-million last year. EBITDA expanded to $5.8-million from $600,000 in the prior year. EBITDA margins were an impressive 53 per cent.
• Highly fragmented market: CEO Edward Wright believes the company can expand its market share in the gastroenterology anesthesia services business through acquisitions.
• Demographics: The aging population is a positive for CRH. For instance, it is estimated that more than 50 per cent of people by age 50 will have hemorrhoids.
• Experienced team from ID Biomedical: The company’s chairman, Dr. Anthony Holler, its chief financial officer, Richard Bear, and director, Todd Patrick, were all previously employed at ID Biomedical Corp. Mr. Holler was the CEO of ID Biomedical until the company was acquired by GlaxoSmithKline in December, 2005.
• Insider transaction activity: Board member David Johnson has been actively accumulating shares, purchasing 81,450 shares in May and 4,450 shares in August. This buying activity may be evidence of confidence in the company’s fundamentals and outlook.

Valuation:

The stock is trading at an enterprise value-to-EBITDA multiple of 9.7 times the 2016 estimate. There are no direct peers with which to compare the stock to; however, many U.S. health care services stocks are trading at double-digit multiples, suggesting that this stock has room for multiple expansion.

Chart watch:

Year-to-date, the stock has delivered spectacular returns to investors, increasing 156 per cent. There is upside resistance near $5, and then at its previous high of $5.42, and downside support at $4.80, where its 50-day moving average lies, and failing that, around $4.50.

The relative-strength index is relatively neutral with a reading of 57.

Analysts' recommendations:

There are six analysts who cover this small-cap stock, and all six have buy recommendations. One-year price targets range from $5.10 (Canadian) to $7. The average one-year price target is $6.05, implying a potential double-digit return of over 20 per cent.

The consensus EBITDA estimate is $ 24.5-million (U.S.) in 2015 and $ 28.8-million 2016. The earnings a share estimate is 15 cents a share in 2015 and 21 cents a share in 2016.

The bottom line:

Given the recent market volatility, on a pullback, this stock appears attractive below $5. I believe this is a stock with long-term upside potential.

Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com