Plenty of Risks Remain In St. Jude's Stock

NEW YORK (TheStreet) -- Wall Street can be a funny place some times, if not entirely irrational. While some stocks can often languish in the absence of good news if not drop, there are those that can thrive regardless of constant streams of negativity news. It's as if they've become bullet-proof.

St. Jude Medical ( STJ) fits this description -- much to the dismay of many bears, waiting patiently for the stock to get cheap.

There's no denying that St. Jude has enjoyed years of strong performances in the medical devices industry. But over the past several quarters, the company's solid reputation has taken hits. There have been concerns related to the company's Riata and Durata Leads, which is used by patients to help prevent (among other things) heart failures.

These leads, which help carry the electrical impulses to the heart and provide information from the heart to the devices, were reported to have malfunctioned from premature insulation failure. The unfortunate situation, which has resulted in several product recalls, has not only brought about class-action claims, but it has recently garnered the attention of the Food and Drug Administration. As it stands, St. Jude is now operating under several written warning from the FDA.

This is just the negative public-relations issue. On the operating side, there have also been concerns about the company's ability to compete against rivals including Johnson & Johnson ( JNJ) and Medtronic ( MDT), which are seen as more nimble. The issue has been with St. Jude's product pipeline, which I've never thought inspired any sort of real confidence about future growth.

With such concerns, you would think that investors would approach the stock with surgical gloves to avoid getting their hands dirty. But the Street has other ideas. Despite coming off three consecutive dismal quarters, not only has the stock risen 32% over the past three months, but shares of St. Jude have soared almost 50% in the trailing 12 months.

I'm not blaming St. Jude here. It's not the company's fault that investors have fallen in love with the stock. But it does seem that investors are betting on hope and praying that St. Jude comes of out this situation intact. But I believe that's a bit too much to ask, especially for a stock that's already posted such strong gains. For St. Jude investors, it seems foolish to keep pressing your luck.

What's more, the operational performances, which once demonstrated enormous potential, continue to decelerate. In the recent quarter, not only did the company post another decline in overall revenue, led by a 6% decline company's pacemaker business, but one of St. Jude's largest segment, the cardiac rhythm management (CRM) business, dropped again by 2%. This comes after CRM declined by 7% in the April quarter.

If there was any good news, it was in the company's atrial fibrillation business, which grew better-than-expected at 12% year over year. But even in areas like this where St. Jude does well, it still wasn't enough to impress me -- not when Johnson & Johnson posted 16% growth.

I don't want to make this sound like I'm just beating up on St. Jude. Though I've detailed some concerns with the company's products and its overall business, it's also worth noting that the company has done pretty much everything in its power, including subjecting the leads through rigorous testing to ensure the safety of customers. In fact, the FDA recently approved two St. Jude products that are said to help diminish the adverse effects of the malfunctioning leads.

So, there is progress being made as St. Jude has cooperated with the FDA's requirements. Nevertheless, to the extent that it justifies willfully dismissing the obvious risks that remain with this company, it doesn't seem prudent. At a P/E of 25, I rather take my chances with Johnson & Johnson -- as expensive as it might also be.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense.

His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio.

His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.

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