One Sector in Poor Health

While ABT appeared to lose half its value overnight, it was just a stock split - but another healthcare name is poised to drop

   

Video Transcript

The other place that we saw under-performance in general was in healthcare. Depending on what data source you’re looking at, you might have seen healthcare really looking ugly but that was because Abbot Laboratories (NYSE:ABT) did a stock split so that data will be a little bit distorted until they adjust everything for the split. Abbot Labs really didn’t lose half of its value; it split the company in half, actually, so that drops the price of the stock down 50%, in this case, or nearly so. That will all get erased.

But even if you neutralize that and add that back in, we saw significant under-performance amongst healthcare. So, I did an interesting experiment. I pulled a list of all of the stocks with a market cap over $300 million.

Each stock files a description of the company with the SEC. It’s a teeny profile of the company. It’s about a paragraph long, and all of the companies that mentioned Medicare in the profile that they submit with the SEC, I searched and pulled all of those companies. There were 30 of them.

At the top of the list were Aetna (NYSE:AET) and No. 30 is WellPoint (NYSE:WLP). What was interesting was I looked at basically their performance on Wednesday, and their average performance was positive. They were up, on average, 1.5%.

Why is that a problem? No. 1, because, looking at the major indices, the rest of the market was up 2.5% to 3%, depending on what you were looking at. That’s a fairly significant level of under-performance.

That presents some interesting opportunities because, first, we need to think about why would healthcare have under-performed so much? I think we can explain why retail stocks were under-performing, so that may be a pool of stocks that we’re looking at for bearish trades in the near term for our SlingShot Trader service. But I would put a placeholder on retail because we’re not actually trading anything there.

But we are trading something in the healthcare sector: Merck (NYSE:MRK). Looking at Merck’s chart, it’s a pretty classic head and shoulders pattern. We opened this position Wednesday with the MRK Feb 40 Puts. We were looking for 70 cents or less, and with the rally, we saw MRK pop up a little bit more.

MRK doesn’t have to move very far; it’s not a very volatile stock. It does not have to move very far for the price on the option to move quite a bit because there isn’t a whole lot of time value embedded in MRK’s options price because it isn’t very volatile on a percentage basis. That’s good. That’s actually something we like to see in a stock. There are risks with that, but there are also a lot of very significant advantages.

So, we have the MRK Feb 40 puts, and at this point, if I didn’t have it open myself, I’d be fine with it. I wouldn’t have any problem opening it right now.

Investor Place advisors John Jagerson and S. Wade Hansen are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news.  Get in on the next trade and get 1 free month today by clicking here.

 


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