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Over the last few months, the pharmaceutical sector has been among the worst performing sectors. From March 4 through April 11, the Market Vectors Pharmaceutical ETF (NYSE: PPH) dropped 7.3% compared to a 3.1% decline for the S&P 500. The recent selloff has brought a number of pharmaceutical stocks down to oversold levels on their weekly charts. One such stock is Vertex Pharmaceutical (Nasdaq: VRTX).
VRTX came to my attention when I ran a scan for stocks whose weekly slow stochastic readings had performed a bullish crossover last week. When I first looked at the daily chart, I wasn’t that excited about the stock. We see the big decline from $86 a share in February down to a recent low just below $60. The one thing that was encouraging on the daily chart was that the recent low wasn’t as low as the low back in November.
When I looked at the weekly chart for Vertex Pharmaceuticals stock, I got significantly more excited about the company. Seeing that the stochastic crossover is what brought the stock to my attention, that is one of the first things I looked at. It also caught my attention by virtue of the series of higher lows the stock has been able to put in over the last three and half years.
After looking at the chart for a while, I looked at previous instances when the stochastic readings crossed over in a bullish manner after being in oversold territory. In each instance, at least for the last three plus years, the stock has rallied sharply in the ensuing months. I took the liberty of circling the three prior instances and the occurrence from last week.
Something like a bullish crossover of the stochastic readings might seem too simple to be effective, but if it has worked in the past, who am I to question it? After all, technical analysis in its simplest form is nothing more than pattern recognition.
VRTX is scheduled to release earnings results this coming Thursday and analysts expect the company to lose $0.68 per share. As a relatively new pharmaceutical company (founded in 1989), seeing a company lose money isn’t unusual as the spending on research and development tends to be high. And whether the company beats estimates or not is irrelevant, the important thing is how investors react to the report.
Looking at the sentiment indicators, the short-interest ratio currently stands at 4.2 while the put/call ratio is among the highest 88% of readings for the past year. There are 25 analysts following the stock with 17 rating it as a “buy” and eight rating it as a “hold”. When you add these three indicators up, you get a sentiment composite reading of 11.8 on my rating system, which is a bullish reading from a contrarian viewpoint.
The stock hasn’t moved too much on its earnings reports over the past year, so I think it would be save to wait until after the earnings announcement to go long VRTX. Even if it moves a little higher, you are taking some of the risk out of the trade by waiting until after the earnings report.
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