Tuesday, July 8, 2008

A Shot in the Arm or Another Bear Trap?

Who pushed oil and commodities off their lofty ledge? Hello! Is NOTHING sacred??? Geesh! Just when you think you've got this market all figured out...Is there nothing left to buy?

Maybe. There is one sector that has been rising stealthily, unseen beneath the blinding curtain of the falling dollar and rising energy and commodity prices. Just last week, this sector was 30th in the rankings but as of yesterday, it's now perched in the twelfth position. And if today's action is any indication, it could break into the Top 10 tomorrow. What is this sector? No, unfortunately it's not the financials--yet. It's another beaten down sector, the drug stocks.

The case for drugs
The chart of the PPH, the Pharmaceuticals Holder (an ETF), shows that it's up 4% over its multi-year low at $66.50, a number that it hit three days ago. But it has three resistance levels at $72.50, $75.50, and $77.50 to clear before I'd be a firm believer. The Biotech Holders, the BBH, paints a rather different picture. Sure, the daily chart has been trending up for the past six weeks, but if you look at the weekly and monthly charts, the forecast may not be as rosy. The stock has declining steadily since 2005, and the pennant that it's now forming can be construed as a bearish sign. Just to be on the safe side, I would personally wait until the price cleared $182 before I put on full positions in the biotechs.

The four major industries
I have no idea if this sector rally will hold, but it's worth a look just in case. What I'm going to do is to pick what I feel are the most compelling stocks in each of the sector's four industry groups: the Generic drug makers, the Ethical drug makers (the large-cap pharmaceutical companies are in this group), the Biotechs, and the Wholesale/Distributors. These groups are composed of many companies and to try to include them all in one blog is too much for me as I'm perenially short-staffed. So, the plan is to tackle the ugly ducklings today and leave the beautiful swans to tomorrow.

The Ugly Ducklings

The Wholesale/Distributors

This is the least compelling group of them all. In fact, with the exception of one stock, it's downright fugly. The two major names here are Amerisource Bergen (ABC) and Cardinal Health (CAH). Both are down over 30% from their recent highs and both are sitting at major support. McKesson (MCK) is the other major player. Its near 4% gain today is but a small step in the right direction. It's going to have to break $60 for me to even consider it. No, the only compelling stock here is Owens and Minor (OMI). The stock has risen almost 70% in two years and the bounce off of its $44 support yesterday combined with a nice gain today signals that a break to new highs could be in the offing. The company is in good financial shape, too. Zacks recently included it as part of its Discounted Fundamental Strength strategy which identifies stocks with strong fundamentals and low valuations. As an added plus, the company pays a dividend (current D/Y is 1.7%).

The Generics
This is another small group and only slightly better looking than the above. The biggest names look to be the most compelling. Teva Pharmaceuticals (TEVA) tops the list. Despite a disappointing trial result for its MS drug yesterday, it was upgraded today by a Goldman Sachs analyst. This left me scratching my head until I saw that Goldman owns 8.5 million shares of the company's stock. Okay. Now that makes sense. Chart-wise, the stock has been sliding away from its all-time high of $50 put in several months ago. It's currently bouncing off support and if it manages to keep moving in a positive direction, I'd hold onto it at least until it retests its high. On the other hand, if it continues in the downward direction, I'd dump it if it breaks below $42.
Nothing else in this space warrants a buy recommendation (and TEVA barely gets that). The “not-as-ugly-as-the-others” awards go to Perrigo (PRGO), Barr Pharma (BRL), Watson Pharmaceuticals (WPI), and Mylan (MYL). All have recently been trending up but hey, so have a lot of other stocks. There's nothing in this sector to get excited about at the moment.

Now that we've cleared the stage of the coyote uglies, we've got room for the real lookers--the biotechs and big pharma which we'll be judging tomorrow. 'Til then!

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