Bullish Case for Boston Scientific Corp (BSX) market capitalization $9 billion.
Industry related companies
- Medtronic (MDT) market capitalization of $39 billion
- St Jude (STJ) market capitalization of $12 billion
In my prior analysis of Westport Innovations (WPRT) on Seeking Alpha (article can be seen here) I detailed the frame work I use to analyze potential investments and how this results in higher success rates or better odds of success.
When investing how should I place the odds in my favor when making a longer term investment?
Assuming your pile of money lying around is not unlimited, you must decide what to invest in, and why. Whether it is stocks, bonds, commodities or a Ferrari you must first analyze the business case for your long-term investments and underlying technical case, - or you're an idiot.
The next critical item relates to the timing of your investment and applies equally to long-term investments and short-term trades. Bad timing can decimate a good investment. Just look at how many people bought technology stocks in the bubble - Microsoft (MSFT), Cisco (CSCO) and Intel (INTC) just to name a few. All are dominators within their industry and great businesses. All with excellent business cases supporting the investments but the timing for an investment was awful and as a result, many people took huge losses or are still sitting on unrealized losses 8 years later. Timing is so important and many investors don't have a clue about it.
I utilize a 3-step process when reviewing investment opportunities as follows:
- Review macro factors driving an industry or company. What I like to call "big picture analysis"
- Review the specific company fundamentals
- Considering the timing of investments
For this discussion, I am going to use Boston Scientific a maker of medical equipment as my example case.
Please note - this is not a recommendation to buy BSX or any other financial instrument. This example is for illustration and education only.
Step 1: Big Picture Review - BSX
After years of uneven industry dynamics and company underperformance that put BSX stock holders in the "hurt locker" the fundamentals have started to improve. The competitive product issues surrounding STJ in the recent headlines may allow BSX to gain market share and give BSX an opportunity to improve sales and profits.
Currently, the potential problems discussed in the news have yet to be proven "true" or "untrue". That having been said, it is theoretically possible that a positive sales trend could unfold as a result of the continued bad press influencing physician product opinions or a future product recall from a competitor. I am trying to position myself to benefit from the "turning fundamentals" of BSX as the competition appears to be stumbling in the market place.
BSX has had other positive developments recently, they include:new CEO (from Johnson & Johnson - JNJ), Cameron purchase for $1.3 billion, European launch of new products and recent earnings per share (EPS) guidance above consensus.
Step 2: Company Fundamentals - BSX
Due to a variety of reasons including; paying several billion dollars to much for Guidant in 2006, industry specific headwinds in the medical device industry, product issues, legal issues and prior management missteps the stock price has been in a free fall since the 2006.
This all could be about to change. Current management has sold assets, managed costs, and acquired new assets. They have also restructured the balance sheet, re-financed debt and have invested in research and development. Initiatives that are now starting to show up in the current year estimates recently given to Wall Street.
Additionally the competitive bad press and potentially changing physician opinions may turn out to be the catalyst needed for BSX to increase market share.
BSX is a turn around story where if sales improve so will the profits and related fundamental ratios.
Step 3.1 - Market Health
Review the technical health of the major indices. I like to use the S&P with an eye on Nasdaq 100 - which unfortunately must be discounted due to the weighting Apple Computer (AAPL) carries within the index. By most measures, the S&P is pausing and has consolidated through time. The basing near the high for the last 6 weeks has allowed the 50-day moving average to "catch up" so the market is no longer extended - but - the higher volume days in the market represent bearish days not bullish. This makes reading the market a bit fuzzy. We need to keep watching the S&P for further information.
Step 3.2 - Individual Stock Health (weekly, then daily charts)
The weekly chart of BSX has been in a down-trend since 2006. The recent weekly chart (below) shows BSX has put in a double bottom, so after years of a down-trending chart the weekly has transitioned into a sideways chart. This change means we can look to at the daily chart for clarification. (Note: the weekly chart will be the last chart to change from down-trend to up-trend because of the longer time-frame; the up-trend will 1st be seen in the daily chart before showing up in the weekly.) This double bottom on the weekly allows for a good stop for our technical trade.
The daily chart has turned bullish and has recently put in a higher lower at the 5.50 area. The volume has also turned undeniably bullish. (Compare the volume bars on this chart to the SPY chart - you can see the difference) Furthermore an upward trending 50-day moving average is about to cross the 200-day - another bullish sign. Additionally, the higher low provides for a stop off the daily chart. BSX would have to trade under the $5.50 area before challenging the sideways weekly chart. Consider the break of the daily $5.50 area as a "warning" to trim your long position.
Risks that must be acknowledged
- Medical companies can be fine one day - and be pulling their product off the market the next. This tends to produce "gaps" on the chart where "planned stops" never have a chance to trigger. So don't be over-invested in stocks with similar qualities.
- BSX has a tax case in process relating to prior year tax return(s). This case could result in substantial interest, fines, and penalties on their prior return(s). The amount is hard to quantify but is very large.
- On the more positive side - there is the annual Heart Rhythm Society Conference coming up in Boston May 9-12. The competitive problems, currently front page news, will be drilled down upon by several hundred physicians (many board certified in electrophysiology) at this conference.
What is the trade?
In our market analysis (step 3.1) we determined that the general market had consolidated sideways long enough to no longer be extended on the daily time-frame. This allowed us to conclude that the general market was not "against" a long trade. Note: I did not say the market was bullish - I said it is just not bearish so long plays can be entered cautiously.
In the trading blog at www.RulingTheMarkets.com on April 25th I posted the following: Buy BSX over $6.10 full position - stop ½ of trade at a close below $5.50 (daily pivot) the other ½ at a close below $5.00 (weekly double bottom). The trade technically triggered around 3pm on the 24th.
I will be looking to add to my position on the 1st daily chart pull back once this stock crosses the resistance at the $6.30 - $6.50 area and the 50-day has crossed the 200-day moving average.
It has been my experience that through utilizing a somewhat diversified portfolio of assets and having the ability to overlap fundamental analysis with technical analysis, that the "common" investor can outperform the markets.
Develop the skills to be patient (which no one in America seems to have) and grow the ability to SOH (sit on hands). SOH is the ability that once you are right (investment gains), you hold on tight for the ride and do nothing but let your gains compound over years / decades. Remember investing (not trading) is for long term capital appreciation - not the $2 your stock went up yesterday.
Finally, you don't need to put all your money allocated for a stock to work all in one trade. Pick a range to buy your full position or a timeline (over weeks) do not be in a hurry. I enjoy averaging into positions that I have unrealized gains currently or writing puts on a portion of the position I wish to acquire.
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Disclosure: I am long BSX.