The stock market beat a hasty retreat over the past month. After peaking above 5,250 in late March, the S&P 500 Index finished last week below 5,000.

That pushes the index back down to where it was in early February. At that time, stocks were rallying on the strength of encouraging inflation data.

That didn’t last long. Since then, strong employment numbers combined with a modest rise in inflation has Wall Street worried.

It has become evident that the Fed won’t be cutting interest rates anytime soon. And why should it? Unemployment is low, wages are rising faster than inflation, and the economy is expanding.

That is good news for consumers. Sure, they would like to see inflation come down a bit more. But given the choice, they will take full employment and increased purchasing power over a Fed induced recession.

However, that is bad news for index investors. Especially those that are heavily invested in the tech sector.

When interest rates are low, future earnings are discounted at a lesser rate. But when interest rates are high, the present value of future earnings is reduced.

Consider the Nasdaq 100 Index. Its performance is almost entirely dictated by very large tech companies.

Since peaking above 18,500 a month ago, it fell below 17,300 last week.

Earnings Adjustment

I’ve been patiently waiting for a selloff in the tech sector. Don’t get me wrong, I like tech stocks. However, I also know they tend to be more volatile than the overall stock market.

That’s why I recommended buying a put option on scientific instrument maker Bruker (NSDQ: BRKR) five weeks ago (a put option increases in value when the price of the underlying security goes down). Although Bruker is in the medical industry, it uses advanced technologies including artificial intelligence to design and manufacture its products.

That day, BRKR closed above $94 after trading below $69 only six weeks earlier. The catalyst for its rapid rise was the release of the company’s fiscal 2023 Q4 results.

At first glance those numbers looked good. Bruker more than doubled its earnings per share (EPS), from 66 cents to $1.41 on a year-over-year basis.

However, nearly a dollar of that gain was due to earnings from a recently acquired business. Excluding that one-time event, Bruker’s adjusted EPS fell more than 5% during the quarter.

That disparity caught the attention of my Mayhem Trader stock screener. It does not believe that a company guiding for modest organic revenue growth of 5% to 7% deserves a forward earning multiple nearly twice that of the S&P 500 Index.

That’s when I made my move. I recommended buying the BRKR put option that expires on June 21 at the $85 strike price. That day, that option could be purchased for less than $3 a share.

Perfect Timing

My timing was perfect. That day turned out to be the high point for BRKR. It immediately began falling and was below our $85 strike price three weeks later.

On April 18, I recommended closing out this trade while our option was priced around $8.35. Based on my $3 buy limit price, the gain on this trade was 183% in less than a month!

At that time, I assumed Bruker’s share price decline was due primarily to concern over rising interest rates. There had been no news out of the company to explain why it was suddenly so unpopular on Wall Street.

At the start of this week, Bruker announced that it will acquire substantially all of the assets of a private company named NonoString Technologies. The total cost will be “approximately $392.6 million in cash, and the assumption of certain liabilities.”

The press release further noted, “In 2023, NanoString generated revenues of approximately $168 million.” In other words, Bruker is paying more than two times sales for an unprofitable business that will reduce its cash and increase its debt.

By the way, NanoString is in Chapter 11 bankruptcy. That is way Bruker added this caveat to the announcement: “Bruker is unable to provide guidance estimates for the NanoString business for the remainder of 2024, as its financial performance cannot yet be reliably estimated, given the disruption of the Chapter 11 reorganization.”

It’s no wonder Wall Street started bailing on this stock a month ago. Once word got out Bruker was negotiating to buy a bankrupt business, the die was cast.

This deal may pay off in the long run. However, it could be years until the financial merits of this transaction are apparent. Until then, Bruker is just one more tech stock that fell short of Wall Street’s outsized expectations.

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