Dykstra: How to Keep This Rally Alive

Stock quotes in this article: SYMC , DOW , SBUX , MSA , BMET , BSX  

I know the company trimmed its third-quarter earnings-per-share estimate last week, but it maintained guidance for the year. People do not realize that Boston Scientific has a significant, broad pipeline, with a serious lineup. Boston Scientific has the ability to generate growth in areas outside of drug-coated stents, which makes this company even more attractive down here at these levels. Remember, this company will generate $6.5 billion of revenue this year.

This is a "rock-solid" company that just happens to be on sale right now. At this price, the first thing you should do after you read this column is buy this stock: Lock and load!

Another medical appliance maker from which I am expecting good things is Biomet (BMET Quote).

Biomet, which makes replacement hips and knees as well as dental reconstructive implants, trades with a forward P/E ratio of 18.26 and sports a return on equity of 23.4%. The company generated over $416 million in free cash flow in the past 12 months and has a minuscule debt-to-equity ratio of 0.18. Thus, Biomet meets the parameters required before I take a position in a stock. I detailed these last week and will repeat them here:

  • The stock's ROE must be higher than the forward PE.
  • The stock must have an abundance of free cash flow. This is very important because this tells me if the company is making real money; i.e., what's left after paying all its bills.
  • The company must have low levels of debt, with a debt-to-equity ratio -- long-term debt divided by shareholders equity -- preferably below 1.0 but absolutely below 1.5. (Note: I'll occasionally tolerate higher-than-normal debt ratios for fast-growing companies if I have strong faith in the firm's potential upside.)
  • Now comes the infamous "but": Biomet will be announcing its earnings on Sept. 21. I anticipate that it will beat the number and report solid earnings for the quarter. Unfortunately, anything that can be misconstrued as imperfection on the conference call can lead those operators on Wall St. to take a stock apart. Given the incredible scrutiny on conference calls nowadays, if Biomet doesn't guide up, it runs the risk of being lambasted like a rookie who fails to run out a ground ball.

    Hence, you have to be careful going into earnings. But I have confidence in Biomet and am long the October $30 calls in anticipation of strong results.

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