Wall Street has been waiting around on a rally like Linus waiting around for the Great Pumpkin. But the rally refuses to show, just like the Great Pumpkin. Nine straight quarters of double-digit growth have not been enough to counter high energy prices, terror fears, and the Federal Reserve's rate hikes. However, have faith the Great Pumpkin will eventually come; maybe Friday was the preview. Until he arrives for sure, there are still a couple of treats this Halloween season. So far, these two stocks have tricked the market. That is about to change.
This is the cheapest stock among the big banks when you consider its growth opportunities. The yield curve will remain flat for a while due to demand for our debt. The Japanese 10-year yields only 1.5%, the German 10-year only 3.4%. The best value is in America at 4.5%. The flattened yield curve is largely a matter of foreigners' insatiable demand for U.S. Treasuries, which explains the "conundrum" of why long-term rates have remained relatively low despite the Fed's tightening campaign. Bank of America has been hurt by this but, like most big banks, it is not as affected by the yield curve as the regional banks. It makes a lot of its money in fees, and with the acquisition of MBNA, through consumer credit. Bank of America has a dividend yield of 4.6%. With a yield like that, one can buy this stock and afford to wait on the Great Pumpkin.
Boston Scientific still has around 50% of the stent market share in the U.S. and did its own study, which showed no significant difference between Taxus and Cypher. Nevertheless, Boston Scientific shares have plunged from a high in the mid-$40s to $24.59 as of Friday's close. Investors now have a great opportunity in Boston Scientific. With a forward P/E of 13 and a P/E-to-growth ratio of just over 1, the stock is cheap. J&J trades at a forward P/E of 16.5 based on 2006 estimates of $3.77 per share; Boston Scientific would be valued at more than $31 if given the same multiple, based on its 2006 consensus estimates of $1.90 per share. As a potential catalyst for that multiple expansion, the company is coming out with a second-generation stent, the Taxus Liberte, that has already added to its market share in Europe. Boston Scientific has a third-generation stent that will come into the market in 2009. This is not a one-trick pony. Boston Scientific has a tremendous amount of cash flow from stent sales that will fund its already large research and development effort. It has several devices coming out, including a leadless defibrillator, vascular closure devices, and disposable endoscopes. Boston Scientific will enter the Japanese market in 2007, and it still has around a 50% market share in the U.S. With a renewed marketing campaign, an aging population that fuels stent industry growth, and new products emerging, Boston Scientific is a buy right here. Potential pitfalls are current patent litigation and an overhaul of the Medicare system as most patients are mature adults. I do not believe either of these will be a problem. The trick is over, it's time for a treat. Charlie Brown may never get to kick that football, but Boston Scientific investors will soon be scoring points again. Happy Halloween.