Last time we took a look at Danaher Corporation (DHR) was in early May. At that time I was long on the conglomerate I wrote how it looked to me like it was in good shape to remain bullish through the year. But at this time I also wrote that I was seeing some bearish signs. I wrote:
Although there is a good chance the stock will continue sideways - bearish for a period of time.
I did not foresee the economic conditions drop like they did in May and the company really lost value peaking at $56 and presenting in a strong bearish pattern at $51.69.
Conglomerates like Danaher Corp. and 3M Co. (MMM) do a better job than most companies battling the macroeconomic environment but places like Europe still remain a concern as all companies that look at their sales see dropping numbers. If this is not enough, the currency exchange rates add to the decline. Luckily, other regions around the world are not hit as hard and help these companies continue to bolster sales.
But this is not enough to keep stocks from slipping, even the ones that are well spread out. Danaher's industrial businesses, such as test and measurement equipment, are one of the areas affected by a weak Europe. And when this segment is a third of your revenue base, it is going to have an adverse affect. Another area, life sciences business, which relies in part on government research budgets, also dropped in sales. General Electric (GE) is struggling as it has seen declines in its healthcare operations in Europe. And I have mentioned 3M before. It has experienced gains but saw them erode away with European sales drying up. So being a conglomerate may help but this slump is big and no one has escaped.
If you are looking at Danaher for a long-term investment, I think it is a good company but while the trend is bearish I would wait for the possibility of identifying a bottom. It does not make sense to invest long term in something that clearly is still moving down. But this does not mean there is not an income opportunity available while you wait. Since the stock has an easily identifiable downtrend, I like trading with these trends for a short-term income play while I wait for the stock to level out. Since we are bearish I would look at a bear put spread play since it provides us with limited risk.
(click to enlarge)
The Options Play
- Buy a September put with a strike of '52.50' (ITM) (priced at $3.10)
- Sell a September put with a strike of '50.00' (priced at $1.95)
- Net Debit to Start: $1.15
- Maximum Profit: $1.35
- Maximum Risk: net debit
- Maximum Length of Trade: 3 months
Reasoning behind the Trade:
- Buying in accelerates the process of getting to '50'.
- Stock is presently in a long bearish trend, we are trading with the trend.
- Economic Conditions are not going to change soon.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
