Stocks took a tumble Monday as healthcare-related industries such as pharmaceutical stocks took the brunt of the selling pressure on apparent profit-taking.
One way to identify profit-taking from long-term selling is to compare the volume of a sector’s ETF to its component companies. In general, profit-taking results in volume spikes on ETFs while the component companies see only moderate increases in volume. That’s what we saw this Monday, as the SPDR S&P Pharmaceuticals (ETF) (NYSEARCA:XPH) was 123% higher than average, while average value on its components was just 38% higher than average.
This short-term profit-taking is occurring ahead of a seasonally strong period for pharmaceutical stocks. Over the past 10 years, XPH has beat the S&P 500 88% of the time in May, and 78% of the time in June.
This seasonal strength combined with short-term selling is combining to present a perfect opportunity to buy the dip in pharmaceutical stocks.
Given the recent pullback and long-term bullish trends, we expect the following three pharmaceutical stocks to take advantage of the sector’s seasonal strength.
Pharmaceutical Stocks to Buy: Akorn, Inc. (AKRX)
Click to Enlarge Akorn, Inc. (NASDAQ:AKRX), a smaller pharmaceutical stock, develops, manufactures and markets generic and branded prescription drugs, as well as animal and over-the-counter health products.
AKRX recently announced that it will restate various previously issued financial statements due to errors identified during their Q1 2015 financial review process. At the same time, the company reaffirmed its 2015 guidance. The news moved shares more than 20% lower on high volume.
Short interest on AKRX was high ahead of the news, with a short interest ratio of 5 times the average daily volume, meaning we’ll soon see short sellers buying shares to close their profitable positions.
The one-day drop in prices also shot shares into technically oversold territory, meaning we are likely to see technical buyers attracted to the undervalued shares.
Akorn has bested earnings expectations by an average of 10% over the last two quarters on healthy revenue growth. The short-term selling gives us a chance to grab these shares ahead of what is likely to be a positive earnings report next week.
We’re targeting a price of $57.50, or 30% gains, over the short term.
Pharmaceutical Stocks to Buy: Impax Labratories Inc (IPXL)
Click to Enlarge In early March, we recommended Impax Labratories Inc (NASDAQ:IPXL) shares given that the stock was an underloved outperformer. More than a month later and 20% higher, we still like IPXL stock on its latest pullback.
Impax is another generic pharmaceutical manufacturer that has been beating analyst expectations for earnings. Their positive fundamentals are playing out in a solid bullish trend, as IPXL stock has been above its 50-day moving average for more than six months.
Short sellers increased their bets against the stock by a whopping 16% in the last reporting period, taking the days to cover to a mind-boggling 12. Analysts are also bearish on the stock, as only 36% of those covering the stock have it ranked a “buy.”
Earnings are confirmed for May 11 after the close, meaning that IPXL will see a big move soon. Our outlook for this pharmaceutical stock is positive, with a target of $55, or 17% higher, as even the slightest positive results from IPXL will get the short sellers buying and analysts moving their targets higher.
Pharmaceutical Stocks to Buy: Depomed Inc (DEPO)
Click to Enlarge Depomed Inc (NASDAQ:DEPO) is a specialty pharmaceutical stock that develops medications to treat pain and other central nervous system conditions. Shares are 60% higher year-to-date as strong fundamentals and technical have attracted traders.
However, DEPO has slumped by about 12% over the past few days on relatively high volume, suggesting that profit-takers have been active locking in profits.
One trader’s profit selling is another’s opportunity, though, as DEPO is trading well above its 50-day trendline and other technical support. As it stands, Depomed could see further declines to $24, where it would be defended fairly strongly.
As a kicker, a 20% increase in short interest over the last period suggests that the stock is ripe for a short squeeze as it heads into its earnings report on May 7 after the close.
Our outlook on the stock has it revisiting the $28 level, or 10% higher, in relatively short order as the bulls should be quick to jump on this technical leader on any good news from the report.
As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.
