St. Jude Medical, Inc. (STJ) — This leading maker of heart valves, pacemakers, defibrillators, and other cardiac devices has been the subject of takeover rumors from time to time. In late August, Financial Times reported Abbott Laboratories (ABT) was preparing a $25 billion bid for St. Jude. Abbott denied the report, but because of the long wait period to receive FDA approvals, it could be beneficial for a large medical company to acquire St. Jude rather than invest in the research, development and registration process from scratch.
St. Jude itself has been active in M&A deals, recently acquiring Thoratec Corporation (THOR), a leading provider of mechanical circulatory technology, for $3.4 billion.
In late July, Capital IQ raised its opinion on STJ stock to “buy” from “hold” and increased its 12-month target by $15 to $92. Its analysts estimate operating earnings will increase 15% to $3.97 per share this year and another 9% to $4.32 next year.
STJ stock is currently trading in a diamond consolidation following a jump from the high $60s in April to over $80 in July. The diamond is being formed at a support zone constructed from early 2014 to April 2015, after shares doubled in price from the $30s in mid-2013.
Diamond patterns are most often seen at tops, but when this formation appears in the middle of a trend it is often a form of consolidation. And that is what I believe we are seeing here.
Note the higher-than-average buying around the 200-day moving average — now at about $70 — from late-August until recently.
Buy STJ stock under $70 with a six-month target of $90 for a gain of nearly 30%. A stop-loss should be entered at $66. The company pays a quarterly dividend of 29 cents per shares for a current yield of 1.7%, which should add to traders’ total return.