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Quick Rise, Sharp Pullback- That's LIFE

|Includes:Thermo Fisher Scientific Inc. (TMO)
Quick Rise, Sharp Pullback- That's LIFE

See also: MarketShadows February 24 2013 Newsletter: Not Done Rising, But Night Will Come

Courtesy of Paul Price

Global biotechnology supplier Life Technologies (LIFE, $58.19) was formed in November 2008 when Applied Biosystems and Invitrogen merged. The company has prospered since. LIFE was reportedly being courted for a buyout by publicly traded Thermo Fisher Scientific (NYSE:TMO) as well as some private equity outfits.

It appeared a deal would be struck. LIFE shares surged to a new all-time high of $65.84 this year in anticipation of a bid. Last week the stock sunk back to the $58 range after terms could not be agreed upon.

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The company continues to do well. Adjusted earnings for 2012's Q4 and full year were both records. Management gave 2013 guidance of $4.30 - $4.45 which compares favorably with non-GAAP EPS of $3.98 for the year just completed.

LIFE's strong business trends and international footprint would be attractive to many suitors. The 80% or so of total revenues that come from consumables/services mimic Gillette's classic 'Make money on recurring razor blades sales and don't worry about the margins on the razors' approach.

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LIFE was willing to sell but is holding out for a higher price than was being offered. Many times one or more of the interested parties will come back to the table. Research firm Morningstar saw fair value for LIFE at $64 as a stand-alone.

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The company bought back 13.8 million shares during 2012 at an average cost of $46.01 per share. Directors indicated another 2 million shares had been retired just since January 1, 2013.

The stock has decent but unspectacular upside if no deal materializes. It could surge quickly again if takeover rumors resurface. I used last Wednesday's price dip and increased volatility to sell some January 2014 $55 puts for a premium of $4.20 per share. Friday's bid was slightly lower due to the shares' late-week stability. The $50 strike would allow for a lower break-even point while offering less potential profit if the stock holds steady or rebounds.

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Note: These options are not actively traded. Be sure to use limit orders that fall between the bid/ask spreads.

Maximum gains on each put would come as long as LIFE closes at, or above, their respective strike prices ($50 or $55). Gains would be 100% of the premium received ($2.25 and $4.00, respectively).

If LIFE closes below the strike price on the expiration date, the worst-case scenario would require purchase of 100 shares per put contract at a net outlay of the 'if put' prices shown in the chart above (strike price minus premium collected). $50 or $55 strike put sellers could sustain up to 17.9% or 12.3% drops, respectively, from the trade inception price without suffering a loss.

We will place an order to sell 1 contract on the LIFE Jan. 2014 $55 strike with a limit of $4.00 when the market opens on Monday February 25, 2013.

Disclosure: Short LIFE Jan. 2014 $55 puts

Click here for a screenshot of the full Virtual Put Selling Portfolio that our LIFE put will be joining.

Stocks: TMO