"Energetic
optimisim is the vision of success."
-- Christina Nikolov
Surgical Stryke
by
Christina Nikolov, Founder ChartWatchCentral
Stock/Ticker: Stryker Corp. (SYK)
Date: March 21, 2003
Opinion: Bearish
Current Price: $70.10
Target Price: $62.29, then possibly $51.74
Commentary:
Since March 10, 2000, Stryker Corp. (SYK) soared 187%, compared to a 36% decline for the S&P500 Stock Index (SPX). And during the past eight months, SYK appreciated 60%, while the SPX rose a more modest 15%.We are not surprised by the appreciation of Stryker's shares in recent years, since the company reported top line and bottom line growth of at least 14% and 20% respectively over the past two years. And over the next three years, Wall Street's prognosticators expect Stryker's bottom line to grow about 20% per year, compared to 19% for its competition.
As investors propel the shares to new all-time highs, they are also boosting the premium they are willing to pay for future earnings. As of the most recent closing price ($70.10 on 03/21/03), SYK touts a p/e multiple of 33 based on December 2003 earnings, compared to just over 20 for its peer group.
The price action of the past four months, while trending upward, also concerns us. Since November, SYK traced out a series of higher highs and lower lows, a pattern which closely resembles a broadening top. (chart #1). While this pattern can break in either direction, we think the odds favor a downside reversal, since this price action transpired on the heels of a dramatic upswing.
SYK is approaching the upper trendline of the broadening formation, which currently resides just below $72. Meanwhile, the shares are overbought on a weekly basis for the third time since the broadening pattern started forming in November. (chart #2) Since the first two occurrences preceded declines, we think this one could as well.
Based on our calculations, we are projecting minimum downside to $62.29. Additional weakness could potentially drive the shares down to the low 50s.
Since downside targets of broadening tops are very hard to predict and usually take several months to be reached, we suggest owning longer-term put options which are also in the money. For example, we like the January 2004 80 put (Symbol: KYCMP) at $12.80. If the shares reach the upsloped trendline of the formation, near $72, you might be able to load up on these options for close to $1000 per contract. You might also consider shorting the shares or writing some April 70 calls as the shares rally.
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Chart(s):
1) Stryker Corp. (SYK) Eight Month Daily Chart
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Click the Chart for an Enlarged View
2) Stryker Corp. (SYK) Thirty Nine Month Weekly Chart
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Click the Chart for an Enlarged View
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