Monday, March 05, 2007

DGX-LH long-short trade closed out

The chart indicates the approximate gain, although the ride has been a bit more volatile than I had expected when i got into the trade. The original thesis was that DGX was 25% undervalued versus Labcorp, but Quest lost a second major contract (following UNH loss) that made me question their aggressiveness in their core lab business. As originally predicted, Quest Diagnostics picked its skirt up from around its ankles and got back to work, with the recent announcement that LH would no longer be serving as Aetna's in-network lab provider.

This helps Quest marginally, but more importantly signals the potential for a major price war, which could hurt both companies longer term (fighting for market share, cutting each others throats). Quest will probably still be a good long-term investment at these levels, but I have decided to speculate a bit and close out both sides of the trade. Net-net, I exited DGX around a 1/2% loss, and LH at a 7.5% gain. I'm sure the trade levels will continue to collapse, but will look to re-enter DGX within the next month or two hopefully.