Focusing on Medical Equipment

I continue to watch my limit order for Thoratec (THOR) down in the $23s continue to mock me on a daily basis, so I'm going to "capitulate" and get at least a starter position going in this name here in the mid $27s. I wrote a detailed piece on the name in early August [Aug 4: One for the Radar - Thoratec] so I won't rehash it. It is hard to find charts like this so I'm going to jump on board here and hope for a pullback in stock price to increase the exposure.



For now we start with a 1.1% stake, and I'd love to see this fall back to the $23s but I've been saying that to myself for nearly 3 weeks now. The company beat the analyst estimates of .09 by .11 last quarter, and analysts still have .09 once again for this coming quarter so we should see another significant beat.

I continue to like healthcare growth stocks as this is where the money flow seems to be going. To that end I added back to Exactech (EXAC) which of course is the one healthcare stock that faltered the minute we added it to the portfolio [Jul 31: Bookkeeping: Beginning Exactech Position] - Wednesdsay it fell to the 200 day moving average so we added down in the $24s range. We cut back on this name just a week ago when it broke below its 50 day moving average of $27s - how quickly they fall. It is back up from a 0.2% position to 1.0%. Since the chart is "broken" my plan for now is to sell this position back in the $27s, assuming it will fail to break above resistance. Buy the breakdowns, and sell the rebounds.

Last, I continue to build up the contract research organization names in bits and pieces [Aug 13: Creating a CRO Basket] - today we added to Life Sciences Research (LSR) and took it from a 1.0% stake to 1.4%. It's a slow mover of late but at least it's moving in the right direction and it is a very steady hand in a market that is volatile and directionless. Just the antidote. Yes they are not as exciting as those money losing housing or airline stocks but at this point it is tiring to watch the rotational battle between oil and anti oil trades every 3-5 days.

There are a few other smaller medical equipment/technology companies I've been looking to add for the past month but they simply refuse to sell off and give me a nice entry point. So I might need to just begin stakes in those as well at the current prices.

Disclosure: Long all names mentioned in fund; long none in personal account.

Comments

[NEH:]

I think you're very foolish to back out of Exactech - I own it, I think it still has a lot of upside at $27/$28, and in this market particularly, one simply has to be a little bit more patient. This stock's price is going to have plateaus. This is one of them.

2008 Sep 03 09:25 PM

[borisb:]

NEH, why dont you back your statement with FACTS?

2008 Sep 04 07:40 AM

[NEH:]

Boris, okay. Though my reply may not include the kind of response you are looking for because my investing style may be quite different. I first look at the ownership, ie, the original SEC filings, and follow it from there. I rely on qualitative research more than quantitative research, but also watch carefully all the valuation ratios and cash flow. I've had Exactech for almost two years and watched it plateau before.

- It lapped around the first plateau at $14-$16 before bumping up to its high of $29 and now its lapping around $27/$28.

- There is alot of family ownership, with a second generation on board, and I think they have and will show good stewardship.

- It's a profitable company that has avoided, for the most part, the current FDA investigation into sales practices that has plagued its peers.

- It is spurring growth through acquisition of complementary products/companies (a spine products company whose name I don't remember offhand) and has acquired a global orthopedics distribution facility, with an existing sales force, in France. They have obtained a $40M credit facility and growth will be accretive.

- They have just been named to the Russell 3000.

- I expect future sales to be healthy because of the aging population.

My expectations are not based upon the heavy quantitative research that the Seeking Alpha audience tends to favor, but based upon my own personal investing experience which is more intuitive. Sometimes I lose, and sometimes I win mightily. I don't follow the crowds. Ever. I look for smaller growth companies in specific sectors that I understand. I never invested in financials because I do not understand them well enough, and they are not directly asset-based. A company, even if highly leveraged, must be asset based. I look for good cash flow. Obviously I could go on and on but I hope this answers your question in part, if not in whole.

2008 Sep 04 10:04 AM

[borisb:]

one metric in exactech's favor, if the story is squeeky clean, the price to sales ratio of 2-ish vs. ZImmer/Stryker 5-ish is quite a discount that might narrow in the longer term.

2008 Sep 07 03:16 PM

[NEH:]

Well there you go, Boris. We'd make a team, I could scout the companies and you could scratch the numbers. I expect it will narrow in the longer term, but based upon my investment experience this discount will be good for another two years I'd say. I wouldn't bet on more than that. My feeling is Exactech has too much to lose at this point to be anything but squeeky clean.

2008 Sep 08 12:57 PM