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Mako: Blood Is Flowing in the Street

If you are looking for Tuesday's drop to signal a short term buying opportunity, you are likely going to find the end of the day Wednesday or Thursday better than Tuesday.

There is no hurry buying the dip with Mako. Stocks dumping as a result of profit warnings usually take a full two good earnings quarters to recover. Take your time and do your homework before allocating capital here. Look for the second break above $20 as the one that "sticks."

Mako already was trading below the widely followed 200- and 50-day moving averages, adding fuel to the liquidation based on chart technicals.

Stryker (SYK - Get Report) a Michigan-based company operating in the same space as Mako is an alternative to investing in Mako. Zimmer Holdings (ZMH) makes for another alternative. While Mako continues to lose money, Stryker and Zimmer are not only executing well, but they also pay a dividend of 1.6% and 1.1% respectively.

Stryker's short interest is a very low 1.8% and Zimmer is currently 3.2%. Compared to Mako's 50%, Stryker and Zimmer might as well have zero short sellers. I very rarely see short interest climb over 50% and a check with my broker shows no shares are available. This indicates that short interest is actually lower than what it would be if short sellers could locate more shares.

Both Stryker and Mako have disappointing levels of insider buys relative to sales. However, Mako's insiders are selling hand over fist in the last six months.

While Stryker insiders have liquidated less than 2% of their holdings, Mako insiders liquidated over 14%. Zimmer short sales are elevated too, but the sales are based on a much smaller amount held. All in all, Stryker appears to be the best of the three.

What's the best play with MAKO? There should be a very attractive trade coming up Wednesday and or Thursday. Near the end of the day if still trading lower, sell out of the money puts.

Option contract volume exploded on Tuesday with big bets in both directions. Market makers will attempt to balance their books with offsetting contracts, but when unable, they mitigate risk through stock. The increase in option demand has pushed premiums higher, creating opportunity if you don't incorrectly predict direction.
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