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Here's An Explanation For Why Abbot Labs Is Bouncing

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Abbott Laboratories ABT 5.85% shares are trading lower by $2.60 at $41.23 in Thursday’s session. The catalyst for the sharp decline is the huge premium being paid for St. Jude Medical STJ 27.17%, which is trading higher by $17 at $78.95.

The actual breakdown for the deal is $46.75 in cash and $0.8708 shares of Abbott.

On most occasions, when a company does a deal and pays a large premium (in the Street’s opinion), its share price will suffer. This is because it is unknown how long it will take for the deal to add to earnings, and companies sometimes take on more debt to finance the deal. Along these lines, investors may question whether the cash could be put to better use in research and development or higher dividend and increased share repurchase programs.

However, chaotic price action can also lead to buying opportunities, such as the one outlined this morning on PreMarket Prep.

Co-host Dennis Dick, a long-time holder of the stock, was displeased at the drop in the price, but was sticking to his long-term thesis in the issue and not adjusting his position.

“We know typically in this market they’ve been punishing the acquirers,” he said. “This is getting ridiculous now, down $4. I’d almost be a buyer of this pullback here.”

During the broadcast, the shares continued to tumble from its closing price of $43.83 towards the $40 level. Co-hot Joel Elconin noted a potential support at the trio of lows from mid-March at the $39.60 area and the potential for a rebound. As it turns out, the issue bottomed at $39.52 in the premarket session. That level was never sniffed off the opening bell as it opened at $40.08, ticked $39.99 and has gone straight up.

Keep in mind that the bruised and battered shorts in the issue (recent rally from $36.40 to $44.01) may want to take advantage of quick decline to cover.

Listen to the full Abbot Labs segment at 13:00 in the clip below. Catch PreMarket Prep every morning from 8-9:30 ET and be a part of the live chat here, or listen to the podcast here.

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