Dear Daily Crux reader,

This week's interview is a bit unusual. We're passing along an active stock recommendation from one of our favorite investment advisories, The Palm Beach Letter.

For those who aren't familiar, The Palm Beach Letter was founded by our colleagues Mark Ford and Tom Dyson. Its focused on one goal: helping readers become wealthy with realistic, common-sense advice, and without taking big risks.

Recently, the PBL team uncovered a rare situation in the stock market that could allow readers to make up to six times their money on a safe, "boring" health care stock.

To get the full story, we sat down with Paul Mampilly, investment analyst and editor for PBL. Paul is a 22-year veteran of Wall Street who's successfully held every position from analyst to billion-dollar portfolio manager to trader.

The information he shares below could be your best chance to safely make hundreds of percent gains this year.

Regards,

Justin Brill
Managing Editor, The Daily Crux
www.thedailycrux.com

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The Daily Crux Sunday Interview
The "merger of the decade" could deliver
500% gains on a boring health care stock

The Daily Crux: Paul, in a recent issue of The Palm Beach Letter, you alerted readers to a big potential deal – a potential "merger of the decade" – that could shock the health care industry... and provide investors with safe returns of up 500%. Needless to say, that caught our attention. Can you explain the situation to us?

Paul Mampilly: Well, first I should give you a little background. When one company buys another – what Wall Street calls an "acquisition" or a "takeover" – the stock price of the company being bought almost always soars. This is because the company that's doing the buying must convince people to sell their shares to them. The only way to do that is pay a premium, or a higher price.

So if you happen to own a company that gets bought out – or are able to identify and buy a takeover target before a deal is announced – it can be very lucrative. Unfortunately, takeovers are relatively rare, and they're typically very difficult to identify ahead of time.

But that's exactly what I think we've found here... And the best part is, the company is cheap enough and safe enough to buy now even if this acquisition doesn't happen.

It's truly a win-win situation.

Crux: OK, enough with the suspense... What's the acquisition you're predicting?

Mampilly: We think health care giant Johnson & Johnson (JNJ) is likely to buy medical device-maker Boston Scientific (BSX).

Now, let me stop here and address the first concern that many readers will have: Boston Scientific's terrible performance in recent years.

It's true. The stock's performance over the past several years has been terrible. BSX has fallen from a high of almost $45 in the mid-2000s to just under $6 today... But BSX today is not the same company or the same stock that it was in 2004 or even a couple years ago and that's where our opportunity is.

Crux: How is it different today?

Mampilly: Well, first let's start with a little background on the company itself.

Boston Scientific manufactures two medical devices used to treat cardiovascular disease: drug eluting stents and implantable cardioverter defibrillators, which are known as ICDs.

Stents are simply small tubes that are inserted into clogged arteries to improve blood flow... Drug eluting stents also release medication that reduces side-effects related to stents and helps keep arteries clear longer than stents with no drugs.

ICDs are tiny devices that are implanted in the body when the heart is not ticking at the right rate. Whenever the heart rate is out of rhythm the device will give the heart a little shock to get it ticking at the right rate again.

Now, there are a few things to know about stents and ICDs.

First, these devices save lives... Lots of people would be dead without them.

Next, statistics show the market for stents and ICDs is large and growing. About one-third of all deaths in the United States are caused by cardiovascular disease. According to the American Heart Association, 785,000 people have heart attacks each year. And every 25 seconds, someone suffers a heart-related health event. These devices are a key treatment option for many of these cases.

As the U.S. and global population ages, these numbers will likely grow significantly... meaning sales of these devices are likely to grow as well. Industry research estimates sales for these two markets combined will increase from $24 billion today to over $54 billion by 2021.

Finally, the market for these devices is what's known as an oligopoly... where only a few companies dominate the market.

BSX is one of just three companies in the stent market, along with Medtronic and Abbott Labs. It's also one of just three companies in the ICD market, along with St. Jude and Medtronic.

Oligopolies are great for investors because they have price control... They can set prices because there's such limited competition. Stents currently sell for about $1,700 each, and patients often need several stents in a single procedure that must be replaced regularly. ICDs sell for about $30,000 each. And the margins for both of these businesses are upwards of 70%.

So what we have in BSX is a hugely profitable business selling high-demand devices to a large and growing market with little competition. That's a near-perfect business for investors.

So why has the stock performed so badly? There are actually a few reasons...

As some readers may know, Boston Scientific and Johnson & Johnson actually fought each other to acquire another medical-device company called Guidant several years ago. Ultimately, Boston Scientific won and purchased Guidant, but the company has had some serious trouble digesting that deal.

The biggest problem was that the company chose to borrow money to do the deal, and it was an enormous amount of money. The company went from holding very little debt to owing close to $8 billion after the deal. And this weighed heavily on the stock price.

The stock has also been hurt by a series of unfortunate events outside the company's control.

In late 2008, when stock prices in general were falling due to the financial crisis, the company's founders – who had rarely ever sold shares in the company – were forced to sell millions and millions of shares due to margin calls related to the Lehman Brothers collapse.

Shares recovered for most of 2009, only to be crushed again by news of a tax increase on medical-device makers related to the government's new health care law. Shares fell to a new low near $5 in 2010.

By early 2011, the stock had again recovered, only to be hit by another round of forced selling completely unrelated to the company.

You see, star hedge-fund manager John Paulson – best-known for making billions of dollars during the financial crisis – had been accumulating shares since 2009 . He clearly saw the value in the stock, and built up a big stake in the company. He owned close to 12% of the entire company at one point. Of course, because of his earlier success, many other investors followed him and bought the stock, too.

Unfortunately, Paulson had a very bad 2011. Because of the billions of dollars he made in 2008, his assets under management grew to an enormous size. He went from managing about $800 million to managing something like $50 billion almost overnight, and he had difficulty adjusting. His funds lost a huge amount of money last year, forcing him to sell many positions, including a complete liquidation of BSX. He went from owning over $700 million of BSX stock to $0.

But it's important to understand that the underlying reasons why he bought the stock were still there. Nothing had changed... He had redemptions he had to meet, and BSX was one of the companies he had to sell. And of course, all the people who followed him into the stock sold, too.

This second round of forced selling sent the stock tumbling again, and it fell all the way back to near $5 again late last year. But while the stock has been falling over the past several years, the company itself has made a significant change for the better.

I mentioned that company's huge debt load earlier... But in the past five years, the company has paid off over $4.6 billion in debt. That's nearly $1 billion per year. It's able to do this because despite all the problems with the stock and the economy over the past several years, the company still earns an incredible amount of cash. BSX gushes over $1 billion in free cash flow each and every year.

The company has now paid off so much debt, it's also beginning to buy back stock. Last July, the company announced a $1.25 billion stock buyback program.

As I told our readers, buying back stock and paying down debt is like a stealth dividend to shareholders. These cash transfers are the equivalent of a 15% annual cash dividend... And they put a strong floor under the company's stock price. Better yet, BSX is even considering initializing a regular cash dividend this year.

Despite all this, expectations for the company are still in the gutter. Wall Street has all but given up on it... which is reflected in its current, ridiculously cheap share price.

For reference, when Paulson began buying the stock in 2009, it was trading around book value.

The price-to-book value today is about 0.8. That is just crazy cheap. And remember, the debt has come down significantly since then and they've been buying back stock.

The stock is also extremely cheap when compared to the company's major competitors on both price-to-book and price-to-sales – two of the most important measures of value. For example, St. Jude and Medtronic, the only other major competitors in the ICD market – trade for three and 2.5 times book value, respectively. BSX is similarly cheap in the stent market... meaning the share price would have to triple or more to reach a similar valuation.

This is just absurdly cheap. Despite its troubles over the past several years, BSX is still a top-quality company. It's actually one of America's great innovative companies. It was the company that essentially invented the stent, and has made some of the biggest innovations in the market.

BSX is generating tons of cash, the operations are in good shape, and from a macro perspective, you've got a big demographic shift that's going to drive a huge market expansion. The company has over 100 new products in its pipeline. And thanks to its strong cash flow and lower debt levels, it now has the money to invest in them as well. Additionally, there are no longer any single funds or managers that own 10% or 15% or more of the stock, so the risk of another large liquidation is greatly reduced.

But because of its recent struggles, Wall Street is very afraid to price this potential into the estimates looking forward... they've been burned by the stock going down so much.

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Crux: Are there any significant risks left in the stock today?

Mampilly: The debt – which was one of its biggest risks – is really no longer a worry. So the primary risk at this point is that some grand innovation comes along that's better than a stent or better than an ICD in cardiovascular treatment.

Now, I know the medical device business from being a health care analyst on Wall Street, and I track these things pretty closely. And the fact is there isn't anything out there like that at the present time. And if anything were to be developed, it would likely come from a company like Boston Scientific because they've always been at the forefront of innovation. Even during the last five years of struggle, it invested about $1 billion in research and development.

So I don't see any significant risks to the business. Of course, if the economy suffered another recession, the business could be affected... But that's true for most companies.

Could the stock get cheaper? It could... but remember that Boston Scientific is buying back its stock and is going to step in when there's any weakness. That's why it's not going to see the lows of 2011 again. But it's still absurdly cheap, and it's not likely to remain at these depressed levels for long.

I would consider the company a strong buy under normal circumstances... But as I mentioned earlier, I believe this story is about to get much better. I believe Johnson & Johnson (JNJ) is about to make a move to take over Boston Scientific.

Crux: Why do you think JNJ is likely to buy them out?

Mampilly: As most readers probably know, JNJ is a behemoth... It's the biggest health care company in the world and generates $11 billion in cash each year. With that much cash, it's always looking to buy other great businesses.

For example, in 2001, it paid $14 billion to buy Alza Corporation. In 2006, it bought Pfizer's consumer products business for $16 billion. And just last year, it paid $22 billion to buy a Swiss company called Synthes.

Recent evidence tells me BSX could be next.

Last September, BSX successfully recruited its new CEO from the management office of Johnson & Johnson's medical device business. It's unlikely that JNJ would simply allow a senior executive with company knowledge to go work for one of its rivals... unless, of course, it was looking to build a bridge between the companies.

Of course, this news immediately generated all types of rumors about a deal between the companies. One of the biggest medical device journals has speculated about a potential deal two times in just the last few months, and four of the top analysts in the industry have reported that a deal between the two companies could be coming soon.

It's also interesting that JNJ's chairman, William Weldon, is on the record saying that he's looking to buy an ICD manufacturer. And the company's chief financial officer has told analysts that the company wants to be a leader in devices that treat heart conditions.

So when you consider what JNJ is looking for, BSX fits perfectly... And it already has a high level executive at Boston Scientific who can protect it from any competitors that may try to buy it first.

Crux: If JNJ makes an offer, how much is it likely to pay?

Mampilly: This is where the story really gets exciting. If this deal goes through, I expect BSX's share price will rise at least 200%. That might seem too good to be true, but it's actually a fairly conservative estimate.

I did a study where I looked at JNJ's previous acquisitions, and I was astonished by what I found. I looked at every medical device acquisition over $1 billion that JNJ has attempted since 1986. I found on average, it has paid at least 4.7 times book value and 4.9 times sales for its acquisitions.

If JNJ were to make an offer at 4.7 times book, it would be approximately six times what Boston Scientific is trading for right now. That would equal a share price of about $36.

BSX trades around $5.95 today... So that would be more than a 500% increase from the current price.

BSX's sales for 2011 were $7.7 billion. So, if JNJ were to pay 4.9 times sales instead, it would still pay $25 per share, or more than four times the current price.

Crux: That would be an incredible return... How do you recommend readers play it?

Mampilly: Our initial recommendation to our readers was to buy the stock for $5.90 or lower, but the stock immediately headed higher after the recommendation.

Fortunately, the company's recent earnings were well above Wall Street estimates, so we've been able to raise our buy price up to $6.50, and are still actively recommending it to our paid subscribers here.

Johnson & Johnson released some interesting news in its latest earnings report, which we'll be analyzing in the next Palm Beach Letter weekly update for subscribers, but rest assured we're as confident as ever this deal will happen.

Crux: Sounds good. Any parting thoughts?

Mampilly: I'd just like to emphasize that Boston Scientific is an elite American company, and the stock would be a great buy even without the possibility of a takeover. BSX is going to throw off at least $7 billion in free cash flow over the next five years. And it's going to continue to buy back stock, pay down its debt, and maybe even start paying a dividend.

At the same time, the stock is trading at the cheapest valuation in the history of the company, and is significantly cheaper any of its peers.

And to top it all off, we've got strong evidence that Johnson & Johnson is about to make a big offer for the company, which could send the stock soaring.

I think it's a great buy in the market today.

Crux: Thanks for talking with us.

Mampilly: My pleasure. Thanks for inviting me.

Editor's Note: Paul thought this deal could be the "merger of the decade," but he recently uncovered another that could be much, much bigger. This potential deal involves two of the most famous companies in the United States. Paul says it will "make front page news all around the world," and could double his readers' money with minimal risk. All the details can be found in the latest issue of the Palm Beach Letter. You can get immediate access by clicking here. Please note this information is extremely time-sensitive... Paul believes a deal could be announced at any time.