Amid years of economic turmoil, government investigations and changing dynamics in the medical marketplace, big device makers have seen growth grind to a halt for high-end items like implantable hips and heart devices.

As a result, many of the larger companies are trying to regain momentum by seeking new products and acquisition opportunities among venture-backed startups and smaller publicly traded medical-equipment makers.

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It's a climate that has favored analysts such as Sidoti & Co.'s Jeffrey Warshauer, who covers small-cap and microcap medical-equipment companies.

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"When you start getting into these small-cap companies, they're underfollowed by the Street as a whole," says Mr. Warshauer, the top stock picker in the Best on the Street survey's medical equipment and supplies category for 2012. "Not so many people really understand the specialized businesses that they're in, and that provides an opportunity to perform."

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Among Mr. Warshauer's best calls: a buy rating on IRIS International Inc., a maker of urinalysis tests that saw its stock climb by more than 45% last fall as industrial-and-medical products giant Danaher Corp. moved to acquire the firm.

 

Mr. Warshauer, 32 years old, entered finance in 2006 after spending a couple of years on Jackson Hole, Wyo., ski slopes. His first jobs were at Janus Capital Group Inc.'s retail call center and trading operations units in Denver—where one can navigate the markets on weekdays and the ski trails in the off-hours.

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A New Jersey native, he returned to the New York area in 2010 to join Sidoti, where he says he is focused on picking companies with strong fundamentals and balance sheets. He has favored companies that have shown they can lock in stable revenue and weather convulsive markets.

 

For instance, his buy rating on SurModics Inc., SRDX -8.52% a company that makes drugs used to coat stents and other medical devices, paid off in 2012, and it remains a top pick this year in part due to long-term contracts with larger device makers. Those deals guarantee stable pricing for drug coatings, Mr. Warshauer says, even as the stent industry faces ever-deeper pricing pressure from hospital customers.

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Mr. Warshauer says he expects a strengthening economy this year to help fuel growing sales for medical products that depend on consumer discretion, such as dental products marketed by firms such as Align Technology Inc. and Sirona Dental Systems Inc. And small-cap medical-equipment investors could continue to benefit from acquisitions by bigger firms, "especially when [buyers] can borrow so cheaply," he says.

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There will still be headwinds for some device companies, Mr. Warshauer says, such as a new tax meant to help pay for the Affordable Care Act. And, he adds, $1.6 billion in cuts for federal funding for life-sciences research could affect some laboratory companies.