After missing it’s last reporting deadline on March 15 due to accounting issues, Valeant Pharmaceuticals Intl Inc (VRX) will finally release its first-quarter earnings results next week.
In a press release on Monday, Valeant said it would hold a conference call to discuss its first-quarter results. With volatility extremely high on VRX stock options heading into the event, options traders are looking at a prime opportunity to profit.
In fact, implied volatility for weekly June 10 series options is currently pricing in a potential post-earnings move of nearly 15%. In other words, options traders are expecting that Valeant stock to fall as low as $24.69 or rally as high as $33.31 in the wake of the company’s quarterly report.
As for expectations, Wall Street is looking for first-quarter earnings to fall 72% to $1.37 per share from $2.36 per share in the same quarter last year. Revenue, however, is expected to rise 8.7% year-over-year to $2.38 billion.
That said, with a probe highlighting accounting issues dating back to 2014, these numbers could be significantly off the mark. Furthermore, there are rumors that Valeant is going to lower guidance at next week’s event, which could further muddy the waters.
Sentiment on Valeant Stock
Turning toward Valeant stock’s sentiment backdrop, we find it filled with negativity. Starting with the brokerage community, Thomson First Call data reveals that only five of the 20 analysts following VRX rate the stock a “buy” or better.
However, the 12-month price target for VRX stock rests at $60.22 — a premium of about 104% to yesterday’s close! Clearly, analysts are in wait-and-see mode, and if next week’s conference call goes well, upgrades are likely on their way.
Returning to the options pits, short-term speculators are also less than enthusiastic for Valeant’s prospects. Currently, the June/July put-call open interest ratio rests at 0.93, with calls only barely maintaining a lead over puts among short-term options. This ratio slips somewhat to 0.86 for the weekly June 10 series, hinting at a bit higher preference for calls.
The lack of heavy call OI also indicates that VRX short sellers are not all that worried ahead of next week’s report. In fact, during the most recent reporting period, the number of VRX shares sold short skyrocketed 44% to 24.3 million. As a result, 7.6% of VRX stock’s total float, or shares available for public trading, is now sold short.
Typically, if these short sellers are nervous that a stock will rally, they buy out-of-the-money calls to hedge their positions against losses. The lack of meaningful call OI could put these shorts at risk of a post-earnings squeeze, leaving many to scramble to buy VRX shares to limit losses.
Click to Enlarge Technically speaking, short sellers may be counting on overhead resistance at $30 and VRX’s 50-day moving average to hold the shares in check. VRX has shown signs of life in the past week, but the shares have not bested both $30 and their 50-day trendline since December.
2 Trades for VRX Stock
Call Spread: With Valeant’s accounting issues mostly priced in, the path of least resistance for VRX stock should be to the upside following next week’s report — barring any major surprises, that is. For those looking for an options trade, a June 17 series $30/$32.50 bull call spread has considerable potential. At last check, this spread was offered at $1.03, or $103 per pair of contracts. Breakeven rests at $31.03, while a maximum profit of $1.47, or $147 per pair of contracts, is possible if VRX stock closes at or above $32.50 when June options expire in two weeks.
Put Sell: Alternately, if VRX stock’s short-term outlook concerns you, a weekly June 10 series $22 put sell has a good chance of finishing out of the money. At last check, this put was bid at 29 cents, or $29 per contract. As usual with a put sell, you keep the premium as long as VRX stock closes above $22 when June 10 options expire at the end of next week. On the downside, if VRX trades below $22 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $22 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
