If you’re already wealthy and looking for prestige, you buy the best house in the best neighborhood. This is a great strategy of getting attention but a poor one for building wealth. You rarely end up getting a bargain. In fact, you often end up paying through the nose. Why? It isn’t rocket science. Everybody wants the best house in the best neighborhood.
Luckily, as investors, we don’t need attention, and buying a broken house in a good neighborhood is a better approach. The trick is knowing you are in a good neighborhood, one that is starting to see people with big money moving in, and we found it…
The good neighborhood that we are shopping in is medical devices; a sector that benefits from both the healthcare being offered to the masses via Obamacare as well as the population generally aging on its own.
These two issues are driving up the share prices for all of the companies in this industry, but our favorite house in this neighborhood is Boston Scientific (BSX), the manufacturer of stents and defibrillators.
BSX has been leapfrogged by the competition and is trying to catch up via acquisitions. At first glance, this sounds bad but it creates a unique situation for the share price to grow. BSX has a stable business in its core markets and has recently made acquisitions that will contribute to revenue growth.
Core markets are stable and provide a solid revenue base to build from. The company is the 3rd competitor in a 3 horse race but because the industry is an oligopoly, customers need at least three companies to be in the industry to keep pricing honest. The market for stents is mature but by launching two next generation stents: Promus and Synergy, the company is able to keep its pricing stable while remaining competitive with the larger players. Customers like this because they don’t want any one company to become a dominant supplier and take pricing power away. Consequently, they will direct purchases to two or three vendors. BSX may not always be the preferred supplier but this structure ensures that it gets its piece of the pie.
Acquisitions are a key part of BSX’s growth strategy. Rather than taking on the risk of pouring money into R&D with unknown results, it is buying companies with an established product line and customer base. A good example is the recent acquisition of Bard EP, a company that detects and treats unusual heartbeats. The company’s revenues in the most recent year are $111 million and it will be accretive to 2014 earnings by one penny but going forward, this could contribute much more to profit growth.
Looking ahead, growth expectations are low at 3% for next year and the company has been raising guidance. Analyst opinions have been mixed on this company because it isn’t the biggest and has struggled to grow organically but that’s why we like it. In our opinion, results are likely to improve from here leaving the so called professionals to jump on board after the stock is up another 50%.
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