Can You Still Profit From Boston Scientific’s Tremendous Run?

BSX stock - Can You Still Profit From Boston Scientific’s Tremendous Run?

Source: Boston Scientific

Over the last six months, Boston Scientific (NYSE:BSX) has experienced an incredible rally. BSX stock has moved higher in 24 of the past 28 weeks, a streak that started back in March.

As the weekly chart for BSX stock below shows the run and when it started.

BSX stock

The rally has moved the 10-week RSI and the weekly stochastic readings into overbought territory. In the case of the RSI, it’s above the 90 level for the first time in over 20 years. In the case of stochastic readings, they haven’t been below the 50 level since January.

The stochastic readings made a bullish crossover in the last week of 2017 when Boston Scientific stock was trading around $25. After the steady climb and the streak of winning weeks, the stock is trading above $39.

A 56% gain might not seem all that great if you compare the return to some of the gains of up-and-coming biotech or pharmaceutical stocks. But this is BSX — a medical device company that was brought public in 1992.

The question is, can Boston Scientific stock keep the momentum?

BSX Stock: The Fundamentals Are Good and Getting Better

Over the last three years, Boston Scientific has seen average annual earnings growth of 16% and sales growth of 9%. In the most recent quarter, earnings grew by 28% and sales grew by 10%. Analysts expect earnings growth of 11.1% for 2018 as a whole and growth of 12.9% in 2019. They expect sales growth of 8.9% for this year and 7.2% for next year.

This consistent growth with moderate expectations could help the stock. When expectations become too high, it makes it harder for the company to meet or exceed them and that can lead to selling pressure.

The profitability measurements for the company are really good. The return on equity is 25.5%, the profit margin is 21.8% and the operating margin is 18.12%.

BSX is scheduled to report earnings again on Oct. 24 and analysts expect the company to earn 34 cents per share on revenue of $2.4 billion. What is interesting is that the earnings estimate hasn’t changed at all in the last 90 days. Many times you will see analysts adjusting their estimates when a stock is performing as well as BSX stock.

BSX Sentiment Is Leaning to the Optimistic Side

The sentiment toward Boston Scientific stock is skewed to the bullish side, but that is warranted with how both the company and the stock have performed. The short interest ratio currently stands at 1.61 and that is trending upward. There were 9.3 million shares sold short at the end of August and on the mid-September report that number grew to 10.4 million shares.

There are 24 analysts covering Boston Scientific with 18 ranking stock in BSX as a “buy” and six ranking it as a “hold”. There aren’t any sell ratings on BSX stock. Having 75% of analysts rate a stock as a buy is generally a slight cause for concern, but in this case it seems justified.

While I prefer to use these sentiment indicators in a contrarian manner, sometimes you have to accept that extreme bullish sentiment is justified and sometimes extreme pessimism is warranted.

The concern is, what can the company do to keep BSX stock moving higher after such a strong move in the last six months?

I Am Bullish on Boston Scientific, But…

While some of my comments on Boston Scientific have been cautious, I want to be clear that I am bullish on the stock for the long-term. However, I don’t know that right now is the right time to buy the stock. Seeing an overbought reading on the RSI that hasn’t been reached in over 20 years is a concern.

The fundamentals are strong and you want the momentum to be to the upside, but I would rather see a slowdown in the Boston Scientific stock rally. A small dip or a consolidation period that lets the oscillators move out of overbought territory would make me more comfortable buying the stock.

I would suggest exercising some patience if you are looking to buy stock in BSX. If you want to make money on BSX stock while you wait to buy it, you could use a put-writing strategy. By writing out of the money put options, you collect the premium for the options you sell. Then, if the stock drops down to the strike price that you wrote, you may have to buy BSX stock at that strike price.

For instance, with Boston Scientific trading up around the $39 level, the January 2019 36-strike puts are selling for 83 cents. Because they represent 100 shares that would give you $83 for each put you write. If the stock stays above the $36 level, the options expire worthless and you made $83 on each option.

If BSX stock drops below $36, you are obligated to buy the stock at $36 if the options are exercised. If you subtract the 83 cents you collected, your cost basis on the stock is $35.17 and you own a great stock at a discount from where it is selling today.

Put writing is a great strategy to use if you are bullish on a stock, but aren’t comfortable buying it at the current price. Instead of just waiting for a dip in the stock or waiting for it to move out of overbought territory, you can make money while you wait.

As of this writing, Rick Pendergraft did not hold a position in any of the aforementioned securities.

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