We recently made a list of Piper Sandler’s Top Technical Stock Picks: 20 Best Stocks. In this piece, we will look at where Inspire Medical Systems, Inc. (NYSE:INSP) ranks among the list of stocks with improving technical rating according to Piper Sandler.
The start of October has seen another wild swing for markets. September’s second half saw Wall Street rejoice as the Federal Reserve delivered its highly anticipated interest rate cut. After an initial muted response from markets predicated on worries that the jumbo 50 basis point rate cut might have been due to economic worries, markets soared. Between the day the rate cut was announced and at the September end, the flagship S&P index and the broader NASDAQ index gained 2.6% and 3.5%, respectively.
However, trading during the first four days of October paints a different picture. From October 1st to the 4th, the flagship S&P shed 0.20% and the broader NASDAQ ended up losing 0.28%. This bearishness was fueled by the Labor Department’s JOLTS data which showed that job openings in America grew in September. For markets, this meant that the Fed now had more room to keep rates higher for longer, and investors started to price out a 50 basis point cut in November. Additionally, job openings grew by 8.040 million and beat economist estimates by nearly half a million openings. Investors also dealt with a tough global geopolitical environment after tensions continued to escalate in the Middle East following Iran’s attacks on Israel.
After the JOLTS data, October 4th came with more good news for investors who were worried about the economy. JOLTS was followed by the highly anticipated nonfarm payrolls data, which further dented hopes for interest rate cuts. This data showed that unemployment in America had fallen to 4.1% and the nonfarm payrolls had jumped by 254,000 which was the highest figure for the preceding six months. Economists had predicted the payrolls to grow by 140,000, so safe to say, the latest data blew these out of the park.
On the surface, the immediate implications of this would seem to imply that as rates can now stay higher for longer than investors had expected, stocks should fall. However, on the day of the nonfarm payroll data release, the flagship S&P and the broader NASDAQ gained 0.90% and 1.22% higher, respectively. Sounds strange, right? Well, some fresh commentary from Baird Wealth Management’s investment strategy analyst Ross Mayfield can provide some insights. He believes that the latest data set was “not the perfect report, but that’s kind of what you need for a soft landing anyways. Some broad based jobs added, but nothing too concerning for the Fed, right, in the form of reaccelerating wage inflation. So kind of a perfect Goldilocks soft landing report.” However, Mayfield adds that the nonfarm jobs report gives the Fed “reason to only go 25 basis points in November, probably 25 in December as well.” Yet, the somewhat ‘still warm’ labor market doesn’t take rate cuts completely off the table. According to the Baird analyst, “the Fed is trying to get back to neutral policy” and subsequently 25 basis points should be the way to go for the rest of the year.
Brad Bernstein, managing director at UBS Private Wealth Management, believes that some stock categories are better suited for the rapidly evolving environment that we’re facing right now. In an interview a day before the nonfarm data release, the Bernstein executive shared that financials, technology, and utility stocks have seen strong performance this year. Starting from financials, the analyst outlined that due to the low interest rates, “the improving yield curve for their balance sheet and what that means for their ability to lend at higher rates and pay cheaper rates on cash savings.”
As for utility stocks, Bernstein outlined that these have benefited from the Fed’s rate cut cycle, adding that small cap stocks have started to shine in the third quarter. According to him, “small cap has worked well in the last few months as well. So one interesting take away from the third quarter is for the first time the equal weight S&P outperformed the S&P. And small cap outperformed the S&P. So we’re seeing a real broadening out of markets and diversified portfolios, balanced portfolios look fantastic for the next 12 to 24 months in our opinion.” For more details on what investment bank Goldman Sachs believes about this bifurcation in the stock market, be sure to check out Goldman Sachs’ Best Hedge Fund Stock Picks: Top 20 Stocks.
The Baird analyst shared his take on the stock market after the nonfarm payroll data release. As per Mayfield, the optimistic economic outlook stemming from the labor market means that cyclical stocks might be worth their while (we covered some cyclical stocks as part of our coverage of 10 Best Consumer Cyclical Stocks To Buy Now). When building a portfolio, the analyst believes that “on the equity side, I really want to do anything but get too defensive here, you know, we have soft landing as our base case we think economic growth is strong, earnings are on the rise.”
These shifts in the stock market, which appear to be in their early stages, have also impacted analyst earnings estimates. According to FactSet, between June 30th to September 30th, the bottom up EPS estimate for Q3 has been revised downwards by 3.9%. This is a striking figure since FactSet adds that average downward revisions for the previous 20, 40, 60, and 80 quarters were 3.3%, 3.3%, 3.2%, and 4.1%, respectively. Consequently, except for the 80 quarter revisions, the current revisions have surpassed all estimates. Sector wise, only information technology Q3 EPS estimates have been revised upwards (by 0.3%) while all others have seen downward revisions. Within these, energy, materials, and industrial lead the pack with their EPS revised downwards by 19.2%, 9.4%, and 8.5%, respectively.
Our Methodology
To make our list of Piper Sandler’s top technical stock picks, we relied on the firm’s list of stocks with improving technical grade ratings lower than or at 19 as of the third week of August. These stocks had ratings higher than or at 20 in the preceding five weeks. The stocks were ranked by the number of hedge fund investors that had bought the shares during Q2 2024.
For these stocks, we also mentioned the number of hedge fund investors. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
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Inspire Medical Systems, Inc. (NYSE:INSP) is a mid sized medical device company known primarily for its Inspire system that helps patients suffering from sleep apnea. The Inspire system accounts nearly for all of the firm’s revenue, making it dependent on the product for solid share price performance. Consequently, Inspire Medical Systems, Inc. (NYSE:INSP)’s key competitive advantage of allowing sleep apnea patients to manage their disorder through a surgical implant is crucial for the firm’s continued success. The reliance on sleep apnea as the sole source of revenue was evident in Inspire Medical Systems, Inc. (NYSE:INSP)’s share price movements in June when the stock dropped by 17%. This was because research showed that weight loss drugs could also treat sleep apnea, and consequently, investors were worried that Inspire Medical Systems, Inc. (NYSE:INSP)’s market could shrink in the future. Yet, the TAM for the firm is sizeable, as estimates show that more than one billion people suffer from sleep apnea worldwide. Inspire Medical Systems, Inc. (NYSE:INSP) is also busy upgrading products, and it plans to launch the Inspire V soon which could add tailwinds to the stock down the road.
Headwaters Capital Management mentioned Inspire Medical Systems, Inc. (NYSE:INSP) in its Q2 2024 investor letter. Here is what the fund said:
“Stepping back from these narratives, the only real concern I have with INSP is the plateauing utilization at existing centers. Utilization by existing physicians has hit a temporary ceiling given the time required to implant the device and allocated OR time by doctors. However, the company can drive improved utilization with the introduction of the Company’s 5th generation device, Inspire V, which should gain FDA approval by the end of 2024. The new device reduces the implant time from 1.5 hours to 1 hour, which will enable existing surgeons to complete more implants per OR day. Inspire V also makes the surgical procedure much easier for surgeons, which should drive greater surgeon adoption in addition to improved utilization. Given that the device won’t be commercially available until early 2025, near-term results for INSP are unlikely to improve. As I detailed in the Q3 ’23 letter, I’m less concerned about weight loss drugs given that the net impact of losing/adding patients at the bottom/top of the patient funnel is likely to be neutral to positive for the company, although there could be a temporary disruption to patient flow as consumers trial the new drugs. I expect the competing product to have minimal impact on INSP and the insurance coverage will prove to be a temporary headwind. INSP’s current valuation embeds many of these concerns and ignores the fact that the company is still growing at +20% annually with improving profitability. Med tech assets with these financial attributes and a TAM as large as sleep apnea have historically traded at much higher multiples. As a result, we continue to own the stock and will patiently endure these growing pains as we await more positive results next year.”
Overall INSP ranks 13th on our list of the stocks with improving technical ratings according to Piper Sandler. While we acknowledge the potential of INSP as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than INSP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
Disclosure: None. This article was originally published on Insider Monkey. All investment decisions should be made after consulting a qualified professional.
