It is said that blood and family are the ties that bind.  It is also accepted that even the unrelated can be bound by circumstances.  Unfortunately, two of our portfolio stocks, McKesson (NYSE: MCK) and Diebold Nixdorf (NYSE: DBD), currently share a different type of binding influence, that of difficulties in doing business in Europe’s post-Brexit changing landscape.   Yes, sometimes it’s impossible to prove that there is a connection between events.  But if you’ve been around a while, you know that the school of hard knocks teaches one concept: there are no coincidences.  

Thus, even when all you have is a guess, timelines are important.  And in this particular case, the hard knocks started with the EU’s $14.5 billion tax judgment against Apple (NSDQ: AAPL). From that precise point in time, tensions along the regulatory fault lines between Europe and the U.S. have certainly risen. Thus, although it is difficult to quantify how much of the recent activity and subsequent decline in the stock of Diebold and McKesson is related to what could be a political tit-for-tat between Europe, London and Washington, the ongoing situation, especially in this tense geopolitical period, raises important questions for investors regarding their ownership of these companies’ shares.   For more on that, read my “Final Thoughts” at the end of this column.  But for now, let’s talk stocks.

UK Review of Diebold Nixdorf Merger Weighs on Shares

Shares of Diebold Nixdorf (NYSE: DBD) the world’s largest ATM manufacturer have been falling over the last few weeks and are now trading near the $24 area, where they have found support four times since January 2016.  Diebold’s merger with Germany’s Wincor Nixdorf has been approved by most major governments except for the U.K., which in August raised alarm bells on the transaction citing the lack of competition with NCR being the only realistic competitor on the landscape.  Never mind that NCR still has close to 30% of the global marketplace and won’t be doing everything it can to gain ground.

Aside from the recent slide in the price of the Diebold shares, the only other tangible effect of this review so far has been that in the U.K. the company has to keep the brand names – Diebold and Wincor – separate until the review is done.  Elsewhere, the company is touting its merger and seems to be moving forward.  What is most troubling to investors that own the stock, such as this analyst, is that there is no real news coming out of the U.K. regulators or the company with regard to the future of the review. What remains in place is the notion that this is a sensible deal that could turn around the fortunes of Diebold quite meaningfully by increasing its market share in ATMs and increasing its revenue and earnings base of the self-service kiosk market via the dominant market share of Wincor in that sector.  

Price is the Ultimate Truth (and Time Will Tell)

Should we be worried?  Anytime any government is trying to bust up a merger, it’s good to be cautious.  But no one knows how this is going to turn out.  I’ve always adhered to a simple investment philosophy, which is that price is the only truth. In the case of Diebold, I see a stock that has fallen back to a key price support area near $24. It is still a value play selling at nearly 8 times earnings and delivers a dividend of $1.15 per year (4.7% yield).  The merger is clearly in question and can fail, and that could knock the stock’s price down further.  But as a value investor, I have to be prudent and see what happens in this price area before I make a final decision since $24 has been a reliable buy point several times in the recent past.  I also know that it is foolish to hang around a sinking ship, which is why the most sensible thing to do at this point is to hedge the stock through a put option while we wait for new developments.

So this position will have three legs for now: (1) I am keeping the February 2017 call option trade open because it’s still a long way off to February and much can change; (2) I am recommending keeping the shares for now, as well, but I am adding a sell stop of $21 in case things get worse; and (3) I am recommending the purchase of a February 2017 $22.50 Put option (DBD_021717P22.5) to protect the shares from a further price decline. 

Buy DBD February 17 2017 $22.50 Put option (DBD_021717P22.5) up to $2.

Disclosure: I own shares and February 2017 call options on DBD. 

McKesson Gets Raided

Shares of McKesson have been falling over the last two weeks.  In last week’s column I noted that the CEO had been selling shares.  I also noted that he does this on a regular basis, has been doing so for years, and that there has been no real long term effect on the price of the stock until recently when he sold shares right before the company’s recent price swoon. Now, one of the company’s European subsidiaries, Gehe, has been raided by German authorities along with eight other drug wholesalers as part of an investigation involving allegations of price collusion.   McKesson acquired Gehe as part of its $5.4 billion purchase of Germany’s Celesio (which owned Gehe) in 2014 in order to gain access to 16 EU countries.  As with Diebold above, this is the start of an uncertain period in a place full of uncertainty, the EU.  McKesson has had some issues with regulators in the past and settled price manipulation litigation in the U.S. for the sum of $355 million without admitting wrongdoing.  And since there are no coincidences, there has to be a question on the timing of the CEO’s recent sale of shares, even if past sales have not been linked to any adverse events as far as we can tell.

At this point I am concerned, but I am also weighing the long term potential upside of a company with able management (despite the CEO being a serial insider seller), expanding market share, and the potential for an upside surprise over the next 6-12 months or less, against the short term damage that uncertainty over what seems to be an industry wide investigation of price collusion in Germany.  So I’m opting for managing risk, remaining vigilant,  and seeing what develops.

Buy McKesson November 18, 2016 160 Put (MCK_111816P160) up to $6. Sell Stop $4.

Final Thoughts

I’ve been concerned about the overall risk in the stock market for weeks.  Thus, it is possible that the EU’s tax ruling on Apple may have influenced the timing of the U.S. Department of Justice’s recently proposed $14 billion fine on Germany’s Deutschebank (NYSE: DB), for events that occurred eight years ago.  The proposed fine comes within two weeks of the EU’s Apple Irish tax raid.  It is also plausible that the recent issues affecting McKesson and Diebold may be related, although this would be hard to prove.

What we do know is that the EU has dismal economic fundamentals, that it has nearly negative interest rates, that “Syrian refugees” are fighting right wing partisans in the streets of German villages, and that Germany’s chancellor Angela Merkel has described the European Union’s situation as “critical.”  We also know that the U.S. is in an unprecedented election season and that its $20 trillion national debt is a major issue.  Altogether, the current situation has all the ingredients for a very bumpy ride.

Breakthrough Tech Portfolio Changes this week

ProShares Ultrashort ETF (NYSE Arca: BIS) Buy up to $36 with a trailing 8% Sell Stop currently at $29. Bought on 8/25/16 at $33.44.  Closing price on 9/16/16 was $31.18.

Diebold Inc. (NYSE: DBD). Buy up to $32 with a Sell Stop at $21. Bought on 8/19/2016 at $28.05. Closing price on 9/16/2016 was $24.42.  Dr. Duarte owns shares in DBD. 

Options Portfolio

Buy:  DBD February 17 2017 $22.50 Put option (DBD_021717P22.5) up to $2.

Buy: McKesson November 18, 2016 160 Put (MCK_111816P160) up to $6. Sell Stop $4.