June and July’s recommendations have mostly expired, and the realized investments have generated returns just north and south of 4%, respectively.

August’s recommendations are still in process, generating a very small unrealized loss (mainly due to Wells Fargo’s negative contribution, though its price has recovered a good bit since last update).

September’s recommendations seemed as though they were off to a fine start until today, when Zimmer Biomet Holdings (ZBH) plunged 14% due to weak 3Q 2016 earnings. It is an expensive stock, trading over $100 / share, so it makes our September numbers look particularly poor – an unrealized loss of 5% overall.

We are including Morningstar’s Debbie Wang’s earnings review below.

Zimmer Biomet reported soft third-quarter results, but we’re leaving our fair value estimate [N.B. $130 / share] unchanged because our adjustments were not enough to materially move our valuation. Quarterly organic revenue growth rose a mere 1.6% in constant currency year over year, as the firm ran into internal supply issues that kept it from fulfilling orders for high-profile products. We view this as an unforced error on the part of Zimmer that should be addressed over the next couple of quarters. On one hand, there was nothing we saw in the quarter at Zimmer Biomet or with its key orthopedic competitors that would indicate a worrisome weakening of underlying demand. On the other hand, we think Zimmer Biomet missed out on the robust volume growth in large-joint reconstruction that characterized the third quarter as it struggled with these internal issues. Fortunately, the surgeon switching costs that underpin Zimmer’s wide economic moat remain high and should mitigate any brand switching during this transitory period to iron out the supply issues.

We were surprised by the magnitude of supply problems, stemming from the lack of full integration between Zimmer and legacy Biomet to give managers a comprehensive view of order trends and inventory across warehouses, which led to poor demand forecasts and coordination of manufacturing, and ultimately, a dearth of popular products and inability to fulfill orders in a timely manner. Although the early days of the Zimmer Biomet combination were somewhat bumpy, we had mistakenly thought management had largely worked through the integration issues by summer. Now, the firm is set to roll out some new solutions to address the issues leading up to this quarter’s situation. However, we would not be surprised if there is some additional turbulence in the near term as Zimmer Biomet fully integrates information systems and supply chains.

All the details are in the spreadsheet below. Please reach out to us if you have any questions!