St. Jude Medical: Looks Like a Hold For Now

St. Jude Medical (STJ) looks like a potentially strong stock over the next 12 to 18 months, and several services have buy ratings on the medical devices maker’s stock. Options traders appear optimistic.

But there are detractors, too, who are worried that the company is overly optimistic about its organic growth prospects over the next five years. And they’re saying the chances the company will be an acquisition target anytime soon are pretty small.

Technically, STJ is one of the strongest stocks in one of the strongest sectors in a bear market. STJ is a sell on monthly charts, where it has been down each of the last five months. But it’s a buy on the weekly and daily charts and recently broke out on the point and figure charts.

On point and figure charts, the price objective for the $43 stock is $53. Morningstar and Standard & Poor’s both give the stock four star ratings out of a possible five stars. At Morningstar, that means the stock is trading at about 84% of the advisory service’s $51 fair value. Morningstar says consider selling the narrow moat stock at $66, or 52% above the current price. Even if it needs two or three years to get there, that’s not a bad return. Morningstar is projecting a 16% annual return for the stock.

In the options market, STJ Jan 2010 50 leaps are trading at prices that suggest speculators who are buying calls think the stock will touch a little over $55 during the next 12 to 18 months, while the bears who are buying puts are valuing the stock at just under $40. The call open interest is 179 contracts, while the open interest on puts is only 28 contracts. This shows there is more energy on the bull side than on the bear side.

STJ’s PEG ratio (PE/projected growth rate) is a pretty low 1.1. This can mean the stock is under valued as Morningstar thinks, or it could mean the stock isn’t getting much respect from Wall Street despite management’s optimism.

Fundamentally, the STJ is pretty solid with a return on assets of 11% and a return on equity of 21%. It pays no dividend.

Investor’s Business Daily’s web site http://www.investors.com gives STJ a lofty composite rating of 98, comprised of ratings of 89 for earnings per share growth, 84 for relative strength, and “A” ratings for group strength, profitability and accumulation and distribution by institutional investors.

Thus, in the current bear market, STJ is showing some strength, but given some thoughtful concerns about its growth prospects, I’ll just stick with my small holdings of January 2010 leaps and take another look if the stock falls back to bottom of his recent range to about $38 or $39.

Charts for STJ and its competitors, MDT and BSX can be found here.

Disclosure: Long STJ.