The stock of U.S. Surgical, which is down to 25 from 105 last July, has produced a bonanza for short-sellers this year. So have the shorts cashed in their chips? Not a chance. They maintain that U.S. Surgical, the pioneer in developing laparoscopic instruments, is still way overvalued. They see the stock skidding to 10.
Some bulls now acknowledge that the shorts may be right. Even the bold optimists who snapped up shares in early May, when the stock was down to 35, have given up. As reported in this column (BW--May 17), Keith Schneider and Clarence Bartow of Garrison Partners were buying then because they believed U.S. Surgical had hit bottom and was on its way back up to the 50s. Wrong.
One money manager who shorted the stock at 100 says there's no way the company can make money this year. "Even if the laparoscopic business improves, reusable instruments--rather than the disposables U.S. Surgical makes--will dominate the market," says the manager. "So we don't know where the earnings will come from."Indeed, the company posted a loss for the second quarter of 39 a share, vs. earnings of 58 a year ago. That loss was bigger than the 25 deficit the bears had expected. And the quarter's sales of $228.8 million were below a year ago's $304.8 million.
Another worry is competition from Johnson & Johnson. One bear says J&J's Ethicon unit's laparoscopy instruments and surgical products are now being marketed more aggressively at lower prices to some of U.S. Surgical's major customers. U.S. Surgical declined comment.