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In the first 7 ½ months of 2015, most health care stocks moved higher, but in the last 2 ½ months, the sector has been under intense selling pressure. Valeant Pharmaceuticals International (NYSE: VRX) has seen a similar fate, but it has really been hit hard in the last seven trading sessions, losing over 36% from the high to the low.
Valeant stock got hit to the tune of a 16.5% loss in Monday’s trading session after the House Committee on Oversight and Government Reform sent a letter to the committee chairman asking him to issue a subpoena for Valeant’s documents related to price increases on drugs the company acquired. This is part of the ongoing investigations into price gouging within the biotech and pharma sectors.
Regardless of what happens with the investigation, what investors want to know is whether or not it is safe to buy the stock at this point. And my answer to that question is maybe.
Looking at the daily chart, we see that Valeant stock is extremely oversold, with the 10-day RSI hitting its lowest level since August 2011. The daily slow stochastic readings are in oversold territory as well.
Looking at the daily chart, there doesn’t appear to be any support in sight, but if we look at the weekly chart, we see there is potential support right below the current level via the 104-week moving average.
We also see that the 10-week RSI for Valeant stock is in oversold territory and it’s hitting its lowest level since the fourth quarter of 2008, when the stock was trading under $10 a share.
The sentiment toward Valeant is relatively bullish, with a short interest ratio of 3.03 and 17 out of 20 analysts following the stock rating it as a “buy.” Another aspect of the sentiment toward Valeant is that during the first quarter it was the most purchased stock by hedge funds, according to a report from S&P Capital IQ.
Bill Ackman’s hedge fund Pershing Square is one of the largest single shareholders in Valeant. As of mid-March the fund owned almost 20 million shares. Think about that. How would you like to watch a stock that you own 20 million shares of drop $100 a share in less than two months? That is $2 billion in value shaved off since early August.
While I think Valeant rebounds from here, I would say that it is not a trade for the faint of heart. With pharma and biotech stocks under fire from politicians, it could be a bumpy road higher. It will also be interesting to see whether or not anything materializes out of the Committee on Oversight and Government Reform’s call to action.
I think the 104-week moving average holds as support and the stock moves back up during the next few quarters. I can see it heading back above $200 and possibly back up to the $250 level.
Even with my bullish stance, I would definitely set a stop-loss point on any trade on Valeant stock right now, but rather than use a specific price level, I would use a 15% stop-loss and have it as a trailing stop. That way if the stock runs up like I think it will, but then gets hit with another period like we have seen in the last few days, you may still get out with a gain.
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