Investors Being Tempted by Becton Dickinson Stock
We always want to make sure that our investment decisions are made from the high ground. If we are willing to go out on a limb, we need to make sure the limb is strong.
Folks are eyeing medical supply maker Becton Dickinson and it’s being touted as a smart play for 2020. Aside from the decision of whether we want to jump on board this slower horse or not, this recommendation does provide us to visit a little with what we need to be thinking about when we pick stocks by observing the size and nature of the hole in this particular idea.
It’s not that BD isn’t a good company or stock, and even though its performance this year has fallen short of the broader market by 10%, it has beaten the S&P 500 with no trouble over the longer term so the fact that it might regain more of this glory under the right circumstances, if we have them that is, isn’t unreasonable.
If we are looking to decide whether this play is worthy or not, we need to take an honest look at what the chances of this happening in 2020 may be, which will require clear and convincing reasons to be believable enough to want to put our money on. As if this weren’t challenging enough, once we get done with that, we have to address the bigger question of why we would not just want to buy the ETF that it is part of instead, a question that no one seems to be asking.
A stock can look pretty good, but that in itself doesn’t mean much, and it actually means absolutely nothing, as this always comes down to how something stacks up against other investments that compete for our attention and money. This is the lesson we are given here. If the outlook for BD really is improved, it has to be improved enough to be expected to go from underperforming to outperforming with a high enough probability to get us interested, which is by nature a comparative effort.
When you are coming from behind like this, we have to discount the whole expected move to some degree, which means that the potential for the outperformance must be higher enough to accommodate the risk involved. This is not a matter of pure calculation, as our data is nowhere defined enough to be able to even attempt such a thing, but we still need to have a sense of the magnitude of change that we need to make sense of this, which in this case will require that things heat up substantially to first catch up and then pass an opponent like this.
We therefore need both the magnitude and the probability, and our potential magnitude will need to be reduced by the probability of this not happening, and this all ends up erecting a high wall indeed when it comes to the chances of BD doing this, one that is way too high to likely be able to see over anytime soon, even on our tip toes.
When we look at the evidence that is presented in favor of BD being a buy here, we’re not given much, and in fact we’re not given anything to cause us to believe this. Things at the company remain pretty solid even though the company just backed off on their revenue projections. There’s actually nothing from the company to suggest any sort of revival, and if anything, things are getting a little worse not better, although not to the degree that we would expect very much of a loss of the current degree of momentum the stock now enjoys.
As a matter of fact, this slightly dimmer outlook has already been priced into the stock as this is all well known to the market. It is curious though that we would want to take a stock like this and try to prop it up on hope alone, but people like to do such things and are not deterred very much by the threat of being foolish. A stock that gets smacked around more may be hated more by the market, but it attracts all sorts of people who just love to root and bet on underdogs and aren’t really concerned about how good or how bad the bet may be overall.
Betting on underdogs can make sense if we get favorable odds, but betting on them at even money will only serve to part us with our money over time. Playing stocks are always even money bets, so being biased toward weak stocks is not a healthy habit at all.
Barron Spots a Winner in BD, But Being Propped Up on Air Doesn’t Count
In a featured article on Barron’s, BD is being portrayed as being in a position to surpass the performance of not just the market but the medical device market as well, although they at best end up being apologetic about BD’s relative lackluster performance and don’t even give us a single good reason to believe that things will improve at all relative to the sector as it turns out.
Becton Dickinson is in a very good sub-sector, the medical devices one, which does not depend anywhere as much on research and development like many companies in the medical sector do. This means less risk. The products that they sell aren’t the sort that are here today, gone tomorrow. They are the biggest name in syringes for instance and have been for a very long time, and it’s not that someone is going to invent some other way to inject things that will render the product obsolete.
It’s not that they don’t develop new products though, like the Lutonix coated balloon that has come into question by the FDA lately. Barron’s points out that this product’s declining sales due to safety concerns don’t have that big of an impact on BD’s bottom line, but that’s not a reason to be positive at all.
The company’s bottom line and a stock’s bottom line are different animals though, and the difficulties that they are having with this product may not impact today’s profits that much, but it does serve to dull the stock market’s enthusiasm for future growth. What is being marked down isn’t the impact on earnings this year, it’s the impact that this may have on a time much further out, the time that investors cast their gaze on when they decide how much more valuable that they think the stock will be much later on based upon a company’s long-term growth potential.
With regard to the company’s outlook, they point out that they are still expected to produce good numbers like they are now, but we need to keep in mind that this stock’s current performance has led to its lagging this much, and running at the same speed won’t serve to get them caught up.
The third reason why this stock is supposed to heat up is the fact that they have been hurt by the strong dollar these days, and perhaps at some point the dollar will weaken. This is not anywhere near the threshold of a good reason, and with the dollar remaining strong, it’s just a combination of a guess and a hope.
If we do see something like this though, it will benefit their competitors as well, the ones that reside in the same ETF and the ones that are beating them by a substantial amount, both these days and over time as well.
BD’s lagging did not just start this year, although 2019 did see the gap grow larger. Over the last 10 years, BD has grown by a pretty impressive 348%, which actually serves to show up the S&P 500’s 290% but falls well short of the 505% that the iShares U.S. Medical Devices ETF boasts over this time.
Becton Dickinson’s ETF Wins this Fight by a Knockout
This is a fabulous ETF by the way, and while it may pale in comparison to hotter sectors such as tech, when we account for both its robust growth and its relative stability, this has them looking pretty appealing indeed. Medical devices are always needed as people get sick in good and bad times, and have insurance to pay for things when they do, and medical devices are therefore less subject to the ups and downs of the economy than just about anything else.
We are seeing a tightening of hospital budgets lately though, and this is another reason to be concerned about BD in particular, but it hasn’t really slowed down the device market much and certainly hasn’t hurt this ETF which continues to forge ahead at a faster pace than your average ETF or stock.
Barron’s argument seems to boil down to their admitting that there are issues with BD, which they do their best to downplay, and on the positive side, they see the company at least coming close to its current level of success, which somehow means that they are now primed to outperform this medical device ETF.
We can’t even call this a smoke and mirrors show, because they left out the smoke and mirrors and we’re left to observe the nakedness of their argument in full daylight. What we’re left with is a call to take a single stock out of a good index, one that has been a laggard with every reason to believe this will continue, and go with that instead.
Why anyone would not want to buy the index instead isn’t even discussed, and it is as if they are just looking to recommend a stock without considering what else we might do with the money. Perhaps the stock will grow by 11% as they project, and deliver a 12% return with their 1% dividend added in, but this once again does not mean anything, and especially doesn’t if competing investments such as this ETF are expected to outdo this, which we always need to consider.
Although we mindlessly diversify to levels that far exceed what would benefit us and greatly dilute our returns as a result, diversification has its time and place, and this is one of them. Singling out a single stock in an ETF can make sense, but given that doing such a thing is riskier, we need to at least have enough additional expected return to justify the risk.
What we never want to do is take a stock that has less of an expectation like BD does and add the extra risk in and pretend that we haven’t lost our minds.
The only positive thing that we see with this article is that perhaps people will take a good look at this ETF, see not only how much better it is than BD stock, but also see how good it is overall, which would make this a good read indeed. They don’t connect the dots to this for us of course and we’re left to do this on our own, but once we get the idea, we can come to the right conclusion about which of the two we should invest in, and it’s not the stock.
This ETF has the very desirable features of not going down quite as much as your average stock in bad times, along with going up more during the good times. These are qualities that we should really like to see in investment, much more so than a stock that has been falling behind even more lately in comparison, without any good reasons to think that this will even change let alone reverse.
When we just compare BD with this ETF side by side, a clear winner emerges, but if we just look at the relative stability of company fundamentals and disregard comparisons, we don’t even deserve to be right.
Editor, MarketReview.com
John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.
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