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

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

The 10 Biggest Outlet Malls in USA

The 5 Most Popular Rap Songs of All Time

The 10 Countries that Eat the Most Meat

The10 Most Expensive Countries to Fly To

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!