Dentsply Sirona (XRAY: $47/share) – Closing Short Position – down 16% vs. S&P up 8%

Dentsply Sirona was originally selected as a Danger Zone pick on 10/2/17. At the time of the report, the stock received an Unattractive rating. Our short thesis highlighted the value destroyed in the acquisition of Sirona Dental, misaligned executive incentives, a steadily declining return on invested capital (ROIC), and margins that lagged peers. We added the stock to our Focus List – Short Model Portfolio on 11/3/17.

During the 224-day holding period, XRAY outperformed as a short position, falling 16% compared to an 8% gain for the S&P 500. Since being added to the focus list, XRAY is down 28% while the S&P is up 5%.

XRAY was upgraded to Neutral on 5/8/18 after we parsed its latest 10-Q filing. While XRAY’s fundamentals remain weak (bottom-quintile ROIC and negative economic earnings), the growth expectations implied by its valuation have become less unrealistic after the large price decline. The stock now has a price-to-economic book value (PEBV) ratio of 2.0 and a growth appreciation period of just seven years. As a result, we are closing this position and removing it from our Focus List – Short Model Portfolio.

We hope readers were able to protect their portfolios from this stock while it fell in a strongly rising market.

Figure 1: XRAY vs. S&P 500 – Price Return: Successful Short Call

Sources: New Constructs, LLC and company filings

Note: Gain/Decline performance analysis excludes transaction costs and dividends.

This article originally published on May 15, 2018.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, style, or theme.

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