The LEAPS Option Trader
105 W. Monument Street
Baltimore, MD 21201
Monday, February 27, 2006
#304
** When the Dust Settles… The Insiders Come Out To Play
Today, we have a new recommendation – one that will be the dominant company in heart care. Sounds good, since we are not getting any younger and the upcoming generation of retirees globally will have the highest incidence of heart disease. I know that – I was at my cardiologist last week for an annual checkup, just to make sure the old ticker was still in good shape.
Heart disease is the #1 cause of premature death in the U.S. That statistic is staggering, considering that we are constantly finding news ways to damage our bodies. There are three major players in the non-pill segment of this industry: Johnson & Johnson, Guidant and Boston Scientific are all major providers of devices that can help people detect, prevent and survive heart problems.
Recently there has been big news in the sector with Boston Scientific buying Guidant for $27 billion, topping a bid by Johnson & Johnson for the same company. All the while, Guidant has come under scrutiny for some software glitches in its heart products – not what someone with heart problems wants to hear. To date, the number of deaths attributed to this problem has been miniscule compared to the devices installed. But it is negative news. Guidant is one of the dominant developers and manufacturers of a huge array of products that target cardiac and vascular products. It is perhaps best known for its defibrillators and pacemakers.
Boston Scientific is best known today for its drug-coated stents, used in cardiac procedures. But it is also involved in many other sectors of healthcare that require medical devices, such as oncology, endoscopy and urology. It sells about $6 billion of these products annually, with its stent business making up about 40% of sales.
The merger with Guidant will make BSX the dominant player in the medical device field, with growth prospects that should produce double-digit growth rates for years to come. At least, that is the bet that BSX is making. It is also the bet that J&J was making before it lost the bidding.
The two biggest questions in this deal are whether BSX paid too much for Guidant, and whether the nagging problems with the FDA can be resolved in a timely fashion.
Those are the risks. The rewards could be huge. BSX is trading close to multiyear lows. Arguably, it is the least expensive, growing device-maker in the market today, with shares trading under $25 – about 14 times earnings. Clearly, the shares were knocked down by the Guidant deal, which will be paid for in cash and stock.
Many industry observers believe BSX overspent for Guidant. There are others who think BSX got a bargain. The difference here is that those who think the future is brighter are actually closer to the situation, AND are putting their money where their respective mouths are.
The First Time in Five Years
For the first time in five years, insiders at Boston Scientific are buying shares. And not small amounts, either. A combination of four insiders, two officers and two directors have bought more than $4 million in stock, with the largest purchase made by CFO Lawrence Best, who bought more than 200,000 shares. Since his purchases, the shares have been moving stealthily higher. Recent purchases by a vice president and a director have been made at prices closer to current levels. All of these buys have been open-market buys, and this combination of cluster buying and open market buying are usually excellent indicators for future share price appreciation.
INSIDER & RULE 144 TRANSACTIONS REPORTED – LAST TWO YEARS
Date
Insider
Shares
Type
Transaction
Value*
21-Feb-06
MORECI, STEPHEN F.
Senior Vice President
4,103
Indirect
Purchase at $24.37 per share.
$99,990
16-Feb-06
BURNS, URSULA M.
Director
3,000
Direct
Purchase at $24.31 per share.
$72,930
15-Feb-06
BEST, LAWRENCE C.
Chief Financial Officer
200,000
Direct
Purchase at $22.38 – $22.48 per share.
$4,486,000
13-Feb-06
NICHOLAS, NICHOLAS J. JR.
Director
5,000
Indirect
Purchase at $21.90 per share.
$109,500
13-Feb-06
NICHOLAS, NICHOLAS J. JR.
Director
5,000
Indirect
Purchase at $21.88 per share.
$109,400
13-Feb-06
NICHOLAS, NICHOLAS J. JR.
Director
5,000
Indirect
Purchase at $21.88 per share.
$109,400
But whenever there is a major merger like this one, there is always risk. Can the companies combine operations and cultures successfully? Will they overcome nagging issues with the FDA? These questions should not be taken lightly, so we have to be sure that we are not risking more than we can afford in this play. One way to mitigate risk is to use LEAPS, which we will do. By using LEAPS, we will reduce our outlay to less than 15% of what we would have to put up if we’d bought the shares outright.
Here is what you should do:
Buy the BSX January 2008 $30 LEAP calls. The symbol is WBX AF. These options are currently trading for $2.90 on the offer. Do not pay more than $3.
The annual high for BSX is $33.52 and all-time highs reached in the past two years are in the mid-$40s. If we approach the 52-seek high within the next 12 months, which is my target, we should see a return of 50%-plus from this SPECULATIVE play. As usual, there is no stop loss on this play. I will monitor it carefully and advise you of any changes.
Regards,
Karim Rahemtulla
Current Portfolio:
Company / Symbol: Boston Scientific (NYSE: BSX)
Option / Symbol: Jan. 08 $30 call (WBX AF)
Date Purchased: New
Current Price: $2.90
Comment: Buy. Do not pay more than $3.
Company / Symbol: Target (NYSE: TGT)
Option / Symbol: Jan. 08 $50 put (WDH-MJ)
Date Purchased: 10/20/05
Current Price: $4.40
Comment: Hold.
Company / Symbol: Microsoft (Nasdaq: MSFT)
Option / Symbol: Jan. 08 $30 call (WMF-AF)
Date Purchased: 8/8/05
Current Price: $2.10
Comment: Hold.
Company / Symbol: Doral Financial (NYSE: DRL)
Option / Symbol: Jan. 07 $20 call (OVL-AD)
Date Purchased: 5/6/05
Current Price: $0.40
Comment: Hold.
Company / Symbol: S&P 500 MITT (AMEX: MCP)
Date Purchased: 7/18/03
Current Price: $11.43
Comment: Hold.
Bull & Bear Spreads
Company / Symbol: Nasdaq 100 Trust (Nasdaq: QQQQ)
Option / Symbol: Jan. 07 $42 put (VCQ MP)
Date Purchased: 2/1/06
Current Price: $2.25
Comment: Hold.
Company / Symbol: Nasdaq 100 Trust (Nasdaq: QQQQ)
Option / Symbol: Sell Jan. 07 $38 put (VCQ ML)
Date Purchased: 2/1/06
Current Price: $1.05
Comment: Hold. Sold put against January 07 $42 position.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Jan. 07 $39 put (ORJ-MM)
Date Purchased: 3/1/05
Current Price: $0.70
Comment: Hold.
Company / Symbol: Energy Select SPDR (AMEX: XLE)
Option / Symbol: Sell Jan. 07 $37 put (ORJ-MK)
Date Sold: 3/30/05
Current Price: $0.60
Comment: Hold. Sold put against January 07 $39 position.
Bio:
Karim Rahemtulla is the former Investment Director of The Oxford Club. The editor of The Smart Options E-Report, The Income Trader – A Covered Call Strategy and The LEAPS Option Trader, Karim is also a regular contributor to The Oxford Club Communiqué. His highly successful trading systems use covered calls and LEAPS to boost returns on blue chip stocks, and during the bear markets of 2000 and 2001, his picks outperformed the major market averages. Educated in England, Canada and the U.S. and fluent in several languages, Karim travels the world to find the best investment opportunities for our members.
Copyright – 2006 Mt Vernon Options Club. Mt Vernon Options Club does not act as an investment advisor or advocate the purchase or sale of any security or investment. Mt Vernon Options Club expressly forbids its writers from having a financial interest in any security recommended to its readers. All of our employees and agents must wait 24 hours after an Internet publication prior to following an initial recommendation. And for hard-copy-only publications, 72 hours after the publication is mailed. Investments recommended in this letter should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company. Mt Vernon Options Club provides its members with unique opportunities to build and protect wealth, globally, under all market conditions. The executive staff, research department and editors who contribute to recommendations are proud of the reputation Mt Vernon Options Club has built since its inception in 1984. We believe the advice presented to its members in our published resources and at our meetings and seminars is the best and most useful available to global investors today. The recommendations and analysis presented to members is for the exclusive use of members. Copying or disseminating any information published by Mt Vernon Options Club, electronic or otherwise is strictly prohibited. Members should be aware that investment markets have inherent risks and there can be no guarantee of future profits. Likewise, past performance does not assure future results. Recommendations are subject to change at any time.
