Dykstra: Bullish on Varian Medical Options

With the dollar weak internationally, particularly compared with the euro, an effective investment strategy is to locate companies with growth potential abroad.

A common theme among the companies reporting strong profits recently is a strong presence in Europe. That's because the weak dollar makes American products more attractive to foreign buyers, while at the same time the revenue generated abroad has a corresponding effect on the earnings reports back home.

Adding this approach to my highly effective strategy of locating beaten-down stocks, I believe today's pick, Varian Medical SystemsVAR, makes for an excellent deep-in-the-money call play.

The stock had hard times this year, as earnings suffered and competitors moved ahead in technology. Varian designs and manufactures radiological equipment for the treatment of cancer. Recently the company announced that it is opening a new hub for its international locations in Switzerland. This provides for significant tax benefits, but additionally, it provides Varian Medical with a centrally located strategic base in Europe.

Varian has also made great strides in increasing the capacity of its own technology, while at the same time improving its bottom-line profitability. While the company increased its revenue guidance for the third quarter, the profit expectation decreased because of one-time tax charges.

Investors should note that revenue is on the rise, and future tax rates will be lower from the restructuring in Europe after the one-time charges. This now puts Varian Medical in the same ballpark with competitors such as Koninklijke Philips ElectronicsPHG, an Amsterdam-based electronics company involved in health care, medical systems and technology, and SonySNE, which also competes in this area.

The company's stock has exceptionally strong fundamentals, including a 33% return on equity and an operating cash flow of $255.7 million. CIBC World Markets analyst Amit Hazan recently upgraded Varian, claiming that if orders are stable or increase, the company could very well beat analysts' expectations over the next few years.

With the moves Varian has made, I believe the company is once again in an excellent position to move back up. Varian closed Wednesday's trading session at $41.90, and I will place an order to buy 10 November 35s (VARKG) for $7.90 or better.

Game of Life

In major league baseball, inclement weather forced the postponement or delay of several games last night. Nonetheless, the Mets maintain a slim lead over the Phillies in the National League East with an important four-game series between the two coming this weekend. I would not be surprised if my two former teams produce some fireworks on the field, in addition to the postgame fireworks scheduled for Citizens Bank Park.