Novartis AG (ADR) (NVS) — I last featured NVS stock as the Trade of the Day on Oct. 1, recommending traders sell shares short at $95 with a downside target of $85. At the time, I noted Novartis’ pharmaceutical sales were being negatively impacted by generic competition, price cuts and currency headwinds.
On Oct. 27, S&P Capital IQ Equity Research lowered its earnings estimates and target price for NVS stock after the company reported nine-month sales missed expectations, falling 6% due mostly to a negative currency impact. Its analysts cut their 2015 earnings estimate by $0.18 to $5.12 and their 2016 estimate by $0.21 to $5.49. They lowered their 12-month target by $10 to $99, which is 18 times next year’s estimated earnings versus a 10-year average P/E of 13.8.
Shares hit $95 on Oct. 16, and traders who followed my advice are currently up 9%. I remain bearish on NVS stock and see more downside ahead, so those already in the position should hold.
On the chart, note the sharp channel down and the death cross, a long-term negative, triggered in September. Monday’s gap down should be interpreted as a failure to successfully attack the 20-day moving average at $88.
I am lowering my target to $75, which would result in a potential gain of 21% for the original short sellers. New short positions in NVS stock should be entered at $86 for a possible 13% gain. A stop-loss should be placed at $92 to protect against losses in the event of a rally.
Check with your broker for any special restrictions on selling NVS stock short and be aware that if you hold shares short through the ex-dividend date, expected in early March, you could face additional liabilities.
