A Billionaire Insider Bought This Healthcare Stock

On October 25th, St. Jude Medical, Inc. (NYSE:STJ) Board member John Brown purchased 25,000 shares of the company’s stock at an average price of $38.65 per share- an investment of nearly $1 million. Brown, a billionaire and former CEO of Stryker, joined the St. Jude Board in 2005. Insider purchases should be good signs for a stock: since an insider already has a strong economic connection to the company, it is rational for them to diversify their wealth away from the same company unless they are particularly confident that the stock price is going to rise in the future. We believe that this is why, statistically, stocks that are bought by insiders tend to outperform the market (learn more about studies of insider trading). St. Jude Medical, Inc. provides medical appliances and equipment, mostly products which are used in diagnosing and treating cardiac and cardiovascular conditions.

Revenue was down slightly in the third quarter of 2012 compared to the third quarter of last year according to the company’s report, after having been flat in the first half of the year from the same period in 2011. The company did some cost cutting, but a special charge resulted in earnings being down 22% (adjusted earnings were up 2%). The charges were due to restructuring events in one of St. Jude’s business segments. The stock is down 2% in the last year, while broader market indices have risen. Wall Street analysts are optimistic, anticipating moderate earnings growth over the next year which prices the company at only 11 times forward estimates. Adjusted net earnings per share are on track for $3.41 per share; this would imply a current-year P/E of 11 as well. We think that this looks like a good price if the business can continue to deliver steady results once it is no longer taking special charges.

AQR CAPITAL MANAGEMENT

Phil Gross and Robert Atchinson’s Adage Capital Management cut its stake in St. Jude Medical, Inc. over the course of the second quarter but still owned 2.3 million shares at the end of June (find more stocks that Adage owned). AQR Capital Management, which is managed by Cliff Asness, had a relatively small position at the beginning of April but bought the stock over the next three months to finish the quarter with a total of about 690,000 shares (see more stock picks from Cliff Asness).

Other healthcare equipment companies include Boston Scientific Corporation (NYSE:BSX), Edwards Lifesciences Corp (NYSE:EW), Medtronic, Inc. (NYSE:MDT), and Varian Medical Systems, Inc. (NYSE:VAR). Medtronic and Boston Scientific are priced similarly to St. Jude at forward P/E multiples of 11. Medtronic, easily the largest of these companies by market cap (it is over three times as valuable as St. Jude), actually trades at only 12 times trailing earnings, so it has very little to do in order to meet analyst targets and, at a 2.5% dividend yield, looks like a value stock as well. Boston Scientific reported a large net loss during the third quarter, which stemmed partly from lower earnings in key business segments; with these other companies looking more stable at similar multiples, we’d avoid that stock.

Edwards is priced much more for growth; its $10 billion market cap represents a multiple of 27 times analyst consensus for its 2013 earnings. Earnings in the third quarter were strong- up 34% from the same period in 2011- but was based on a considerably smaller revenue growth rate, so we’re not sure if net income can continue to grow at a similar pace for a long enough time to justify the stock price. Varian has also been delivering good growth recently, with its earnings also up at a double-digit rate in its most recent quarter versus a year earlier. Its earnings multiples tend to be in the teens, as expectations for continued growth give it a premium relative to peers like St. Jude and Medtronic. We might look at it in more detail, but for now would prefer the low growth and low pricing- and therefore, in our minds, lower risk- of those two companies.

We think that Brown has made a good purchase here. St. Jude looks cheap and its business appears to be doing fine, and unless investors study the company and Medtronic in more detail and find the latter even more attractive we think that it is a value play.

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!