Medtech Stock Values Sink Amid Wall Streets Summer Mood Swings

Medtech Stock Values Sink Amid Wall Street’s Summer Mood Swings

You got me goin’ up and down

And around and round

I’m goin’ up and down

And around and round

Goin’ up and down and

Round and round

And round and round we go…

—MIMS featuring LeToya Luckett

By Michael Barbella, Managing Editor

Roller coasters are supposed to be scary. The stomach-churning nosedives, the dizzying twists, turns and loops, the merciless jostling—all appeal to the thrill-seekers, those amusement park denizens who never seem to tire of a two-minute, white-knuckle jaunt that basically ignores the laws of nature. Like a perversion of the pleasure-pain principle, people are drawn to roller coasters for the same reason some children giggle uncontrollably as their fathers swing them around by an arm and a leg—they know eventually they will be returned safely (flushed and panting, no doubt) to their pre-ride positions with their feet planted firmly on the ground.

There certainly is no mistaking the fright factor built into most roller coaster rides: They test our non-phobic, perfectly natural fears of heights, speed and mid-air inversion, giving us the illusion of danger without actually putting us at risk. Clearly, roller coasters are not for the faint of heart.

They’re not cut out for investors, either. Roller coasters make venture capitalists particularly nervous because of the havoc they can wreak on stocks and investment portfolios. Consider the damage inflicted by Wall Street’s wild roller coaster ride during the first half of August, which usually is a placid time of year for the stock market. A string of troubling economic news both in the United States and Europe, however, shattered the stock market’s sweet serenity in early August, sending Wall Street on a nauseating journey of free-falls and ascents, much like the courses of the world’s most thrilling roller coasters.

The trigger for Wall Street’s summer smackdown was, of course, the Aug. 5 decision by Standard & Poor’s to downgrade America’s AAA credit rating for the first time in history. S&P said the historic downgrade symbolized its opinion about the debt reduction plan Congress passed just three days earlier after a contentious battle between political parties. In S&P’s view, the plan “falls short of what … would be necessary to stabilize the government’s medium-term debt dynamics.”

“The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges,” S&P said in announcing its decision.

Analysts believe the downgrade—over time—could boost borrowing expenses for the federal government, costing taxpayers tens of billions of doll­­ars annually. It also could drive up interest rates for consumers and companies seeking mortgages, credit cards and business loans. The precise impact of the downgrade, however, may not be known for months, if not years.

It only took a fraction of that time, though, for the downgrade to impact world financial markets. Having had a full weekend to digest the move and its potential long-term repercussions, investors flocked to U.S. Treasury securities on Monday, Aug. 8, sending U.S. stock prices into a tailspin and dragging benchmark indexes to their biggest slump since December 2008. All stocks in the S&P 500 Index retreated for the first time since at least 1996 as the index’s 10 main groups fell more than 5.3 percent.
Large companies such as Bank of America Corp. (BofA), Ford Motor Company and Caterpillar Inc. suffered the most severe losses, with BofA stock tumbling 20 percent and Chevron Corp. sliding 7.5 percent as oil slid. By the end of the day, the S&P retreated 6.7 percent to 1,119.46, its lowest point since September 2010, and the Dow Jones Industrial Average plummeted 634.76 points, or 5.6 percent, to 10,809.85. About 18 billion shares changed hands on U.S. exchanges, the fifth-highest volume since mid-2008, according to Bloomberg data.

“There’s no reason to get in front of this train,” one investment officer told Bloomberg after trading ended.

Indeed, there was little incentive during that first day of trading after the downgrade to invest in anything risky (hence the significant rise in Treasuries). As a result, companies whose fortunes are tied closely to the economy—firms such as Ford and Caterpillar—bore the brunt of the beat-down.
Orthopedic implant stocks were badly bruised as well, falling an average 9.4 percent on Aug. 8. One of the worst hit was Gainesville, Fla.-based Exactech Inc., a developer of implants, surgical instruments and biologic materials that strives to make every day “A Great Day in the O.R.” (its brand promise). By the closing bell on Aug. 8, it was apparent the company was having anything but a Great Day—its stock plummeted 18 percent, ending at $14.05. In fact, there were few Great Days that week as Exactech’s stock zigzagged between positive and negative territory (along with the rest of the S&P 500), recovering amazingly Aug. 9 but then slipping again Aug. 10 before crawling to a slight gain on Aug. 12. In five days, the company’s stock lost 9 percent of its value, dropping to $15.56 per share from $17.10 per share, according to market data.

Medtech stocks took a considerable hit too, but generally weathered the financial tempest better than their orthopedic counterparts. Shares of Boston Scientific Inc., for example, lost 7.4 percent of their value on the first trading day after the downgrade and 7.3 percent on Aug. 10. However, the Natick, Mass.-based maker of catheters, pacemakers, stents, electrodes and guide wires managed to recoup most of its losses to end the week just 1.3 percent below its Aug. 5 closing stock price of $6.49.

Becton Dickinson and Company (BD) followed a similar path that week, though its stock never lost more than 4 percent of its value. The Franklin Lakes, N.J.-based drug delivery provider suffered its most significant loss on Aug. 8, when shares fell 3.6 percent to $76.38. Over the next three days, BD’s stock bounced around like a yo-yo, rising and falling 3 percent as Wall Street undulated between encouraging gains and aggravating losses. By the end of the week, shares had risen 5.1 percent from their Aug. 8 lows and 1.3 percent above their Aug. 5 closing price of $79.26.

Stock at Cardinal Health, Covidien plc, Johnson & Johnson and Baxter International also grew the week of Aug. 8 despite daily zigzags into positive and negative territory. Shares of Covidien rose 6.7 percent by the closing bell on Aug. 12, while Cardinal Health shares swelled 1.8 percent to end the week at $40.87. Baxter shares wound up half a percentage point above their Aug. 5 closing value of $53.62.

Such radical ebbs and flows in the market was a bit surprising, considering the initial spark for Wall Street’s midsummer meltdown wasn’t totally unexpected. In fact, S&P’s credit rating downgrade really just confirmed a few facts that economists, the market and most consumers already knew—that the United States has a serious debt problem and Washington is deeply divided over possible solutions.

“It’s a very emotional and volatile environment,” Kenneth S. Rogoff, a Harvard University economics professor and co-author of “This Time is Different,” a history of financial crises, said in describing the mood of the market to The New York Times. “An event like this can sometimes trigger a reaction far in excess of what you might expect.”

Though they braced themselves for a bumpy ride that day, few traders expected such a precipitous drop in the S&P 500 on Aug. 8 and the accompanying selling frenzy that brought down good stocks along with bad ones. The selling was so ferocious that shares of Varian Medical Systems Inc. fell 9.2 percent even though the manufacturer of cancer treatment devices and software, radiosurgery products and X-ray merchandise posted a 9 percent jump in third-quarter (FY2011) revenue and a 12 percent increase in diluted earnings per share. St. Jude Medical Inc. stock suffered a similar fall from grace, slipping 6.5 percent to $41.12 despite a 4 percent rise in the company’s second-quarter revenue and a 7.6 percent boost in adjusted diluted net EPS.

Most major OEMs found themselves in the same position, buoyed by encouraging quarterly earnings reports but powerless to stop their freefalling stock values. Shares of Medtronic Inc. lost 7 percent of their value on Aug. 8, while Siemens AG (parent company of Siemens Healthcare) and GE (parent firm of GE Healthcare) slipped 9 percent and 6.5 percent, respectively. J&J held up surprisingly well on that first day, losing only 2.5 percent of its stock value.

Interestingly, J&J recovered well enough throughout the week to emerge from the wreckage virtually unscathed. On the second day of trading, the company’s stock regained more than half the value it initially lost, but those gains were erased on Aug. 10 when shares fell 3 percent to $60.195. Values climbed back up over the next two days, leaving shares 61 cents, or 1 percent above their original price on Aug. 5.

Jabil Circuit Inc. stock sustained minimal damage as well, ending the week 4.5 percent above its original value on Aug. 5, while Medtronic and Varian were the hardest hit. Medtronic’s stock recovered about a quarter of its value on Aug. 9 but collapsed once again the next day and then never recouped much of its value from the week before. Medtronic’s shares were off 5.5 percent at the closing bell on Aug. 12.

The frantic sell-off on that first day proved to be too much for Varian, which could not recover from the initial precipitous drop in shares or the 6.5 percent slide on Aug. 10. Stock for the Palo Alto, Calif.-based firm ended the week 4.4 percent, or $2.56 below its closing value on Aug. 5. Orthopedic stock values fared even worse that week, with shares of Wright Medical Group losing 6.3 percent of their value and shares of Zimmer Holdings Inc. dropping 7.6 percent, or $4.41, below their closing value on Aug. 5.

“The market we are operating in is markedly different from five years ago,” Andrew Lo, finance professor at Massachusetts Institute of Technology Sloan School of Management, told Reuters. “We are seeing extraordinary emotional reactions from central banks, politicians, regulators and investors. We have an environment that is highly unstable.”

And that instability/volatility is expected to continue as herd trading by hedge funds, lightning-fast computer programs and knee-jerk trader reaction to news combine to make intense market fluctuations a more frequent occurrence, financial experts claim. Case in point: Less than a week after the market’s turmoil of Aug. 8-12, investors experienced déjà vu as Europe’s debt crisis and fears of a double-dip recession in the United States pushed stocks over another precipice on Aug. 18. This time, the S&P 500 fell 53 points, or 4.5 percent, to 1,140, and the Dow Jones Industrial Average plunged 419 points, or 3.7 percent, to 10,9990.58.

Naturally, medtech stocks took another hit, with Boston Scientific shares falling 6.5 percent, Siemens plummeting 6.1 percent, Varian dropping 6 percent and St. Paul, Minn.-based St. Jude Medical shrinking 5.3 percent. Exactech, which suffered double-digit losses in the market’s first tumultuous go-round, stood up surprisingly well the second time, losing only 0.74 percent of its stock value. RTI Biologics Inc., an Alacua, Fla.-based provider of allograft and xenograft implants, experienced one of the few increases that day as its shares rose 1.1 percent to close at $3.58.