New Surgery Product Heals Investors, Too

11/13/2007 12:00 am EST

Focus:

Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman and chief investment officer of Schaeffer's Investment Research, says a small arthroscopic surgery has had a nice run-and will have a bright future.

We recommended Arthrocare (NASDAQ: ARTC) to subscribers on August 15th at a maximum entry price of $52.92. On October 29th, the stock hit its target profit price of $63.78. (It trades above $61 now-Editor.)

The fundamental, technical, and sentiment profile remains bullish, and so we recommend subscribers initiate another long position.

According to Hoover's, Arthrocare makes tissue disappear. The company's proprietary Coblation technology uses radio frequency energy to remove soft tissue from the body. Its arthroscopic surgery system lets surgeons use specialized wands to focus the energy and minimize damage to nearby healthy tissue, simultaneously sealing small, bleeding vessels.

First used in arthroscopic procedures to repair joints, the electrosurgery system product line now includes equipment used in ear, nose, and throat procedures; spinal and neurological surgery; cardiology and gynecology, and cosmetic surgery.

Last month, the company reported better-than-expected third-quarter earnings of 39 cents per share, three cents more than the consensus estimate. This marked the ninth consecutive quarter that the company has exceeded earnings expectations. Arthrocare also raised its fourth-quarter earnings guidance to between 48 and 50 cents per share, higher than the consensus estimate of 47 cents. 

Additionally, the company has been rumored to be an acquisition target, which has boosted the stock.

Technically, Arthrocare has far outperformed the overall market in 2007, gaining [more than 60%] this year while the Standard & Poor's 500 index is [down about 2.5%].

Also, during the market's recent swoons, the stock has held up very well. While the NASDAQ Composite index is off 3.9% from its July 19th close (and the S&P is down 6.4%), Arthrocare is actually up [by about a third] over that time. 

This shows the stock is stronger than the overall market and should hold up well on any further weakness, but can outperform on a resumption of the market rally.

Despite the solid fundamental and technical performance, short interest remains relatively high.  The more than 3.2 million shares shorted amounts to a hefty 11% of the stock's float.

Also, options players have been betting against the stock. The Schaeffer's put/call open interest ratio has soared to 1.72, near its highest point in a year.

What's more, sentiment data shows far more puts being purchased to open than calls recently. As contrarians we view the pessimism amid a strong fundamental and technical backdrop bullishly. 

The end result of Arthrocare's strong performance and the pessimistic sentiment is a Schaeffer's Equity Scorecard rating of 8.0 out of a possible 10. This bullish score suggests that the stock should continue higher.

Buy the shares of Arthrocare at a maximum entry price of $65.97. The target price for this recommendation is $82.49. The stop-loss price for this recommendation is $57.49.

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