The Zimmer Biomet (ZBH) idea originally came to us through a Covered Call Corner screen of stocks that a value-oriented portfolio manager was buying.
We wish we would have known this company better at that time, as we would have been happy to sell the stock to that asset manager in the $130 range.
The price dropped heavily after a poor earnings report that was published just a few days after our Covered Call Corner screen. Sometimes these earnings announcement drops are without merit, especially as an acquisition can make accounts difficult to analyze. As such, we set out to value the company to see if there might be the possibility to increase our exposure to this investment.
However, in this case, we think the market is right in selling the stock off. Investors who sold puts / covered calls in this name would do well to close the position on an opportunistic basis. Most-likely value is in the mid $100s – just about where it is trading now. We see the possibility of a lower valuation, but it is still too early to tell how the Biomet acquisition will affect the business one way or another.
We will be publishing a complete ChartBook soon with the specifics behind this recommendation.