Consider yourself warned
Make no mistake about it: I’m a medical devices bull. A growing population of aging Americans coupled with an expansion of our health care system due to the passing of the Patient Protection and Affordable Care Act in 2010 appears to be playing into the hands of further device usage. However, that doesn’t mean that all medical device makers are automatically buys.
Stryker Corporation (NYSE:SYK), for example, isn’t going to win any compassion awards from the American public after announcing the layoff of 5% of its workforce last year in direct response to the medical device excise tax, which takes a 2.3% tax off total revenue to help pay for the Medicaid expansion under the PPACA. Stryker Corporation (NYSE:SYK) isn’t alone, with NuVasive, Inc. (NASDAQ:NUVA) CEO Alexis Lukianov threatening to move his operations overseas because of the medical device tax.
There are other warning signs that should have investors concerned about Stryker Corporation (NYSE:SYK)’s immediate growth prospects. To begin with, Stryker Corporation (NYSE:SYK) was forced to take a $133 million charge in the fourth quarter related to a recall of its Rejuvenate and ABG II product-line hip implants in June. The company halted worldwide distribution on concerns that fretting and corrosion of the implants could cause an adverse tissue reaction or (even worse) pain for patients.
More recently, Stryker received a warning letter from the Food and Drug Administration following an inspection at a facility in Michigan. The letter addressed concerns about Stryker’s marketing of the Neptune Waste Management system despite not having a government-sponsored approval for the device, and for not notifying the FDA regarding a product recall.
These variables are more than enough to cause an investor in Stryker to become concerned, and should be enough for short-sellers to latch onto considering that revenue growth is only in the 4% to 5% range.
Oil is thicker than short-sellers
For all intents and purposes, any company that doubles in less than a year is often going to draw the ire of short-sellers. Even I’m taken back by the amazing run that midstream master-limited partnership Sunoco Logistics Partners has given shareholders since the beginning of June — a rise from $32 to better than $65. Yet, as with Allstate, even a big run like this isn’t enough to scare me away and should serve to keep short-sellers on a short leash.
Sunoco Logistics might be a bit pricey at 20 times forward earnings, but it underscores the amazing opportunity that lies ahead for transportation, storage, and terminal facilities given the sheer volume of natural gas, liquid natural gas, and oil deposits discovered in the mainland U.S. over the past decade. Over the next 10 years, I feel no aspect of the oil and gas industry is bound to see more rapid growth than the infrastructure being developed to transport and store the vast amounts of these new deposits. That would also be consistent with President Obama’s push toward U.S. energy independence, which will rely on unlocking our vast amounts of natural gas reserves.
Another often overlooked aspect here is Sunoco Logistics’ understated 3.3% yield, which has been raised for a staggering 31 consecutive quarters. Why a short-seller would bet against that type of consistency is beyond me!
Foolish roundup
It’s a mixed bag this week, with Allstate and Sunoco Logistics both looking like they have plenty of room to move higher despite having doubled in price. As for Stryker, while I like the long-term potential for medical device makers, a recent rash of recalls, warning letters, and layoffs portends possible growth concerns and enough reason for short-sellers to take a stand.
What’s your take on these three stocks? Do short-sellers have these stocks pegged, or are they blowing smoke? Share your thoughts in the comments section below.
The article Shorts Are Piling Into These Stocks. Should You Be Worried? originally appeared on Fool.com.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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