Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) has enjoyed a solid run during the past week, with TEVA stock up more than 12% since Feb. 10. A strong showing in the earnings confessional kicked off the rally, and news that Momenta Pharmaceuticals, Inc. (NASDAQ:MNTA) and Pfizer Inc. (NYSE:PFE) were having production problems on a generic version of multiple sclerosis drug Copaxone provided additional lift yesterday.
The problem is whether TEVA stock can hold onto these gains.
Analysts at Oppenheimer laid the situation bare yesterday, noting essentially that little has changed for Teva with the generic Copaxone delay. After all, the 20mg generic version is already on the market, and the 40mg version, while delayed, will still make it to market this year — albeit a bit later than expected.
The lone bright spot for Teva was the fact that it maintained its 2017 guidance in its Feb. 13 quarterly earnings report. Teva expects to earn between $4.90 and $5.30 per share on revenue of $23.8 billion to $24.5 billion, versus Wall Street’s target of $4.89 per share in earnings and $23.77 billion in revenue. Most expect the eventual arrival of the 40mg Copaxone generic to cut into this forecast.
Click to Enlarge With expectations so low, any positive news is naturally going to provide a pop for TEVA stock. But there has been very little follow-through buying in the wake of these “pops.”
TEVA rallied north of $36 following earnings, only to decline back below its 50-day trendline in short order. What’s more, TEVA stock is also pulling back in pre-market trading this morning following yesterday’s jump.
In other words, sellers continue to outnumber buyers for TEVA, and recent rallies have been met with profit-taking and heavy selling activity.
What’s more, sentiment has failed to follow TEVA higher. We’ve already seen that Oppenheimer is holding pat despite earnings and the generic Copaxone production issues, and the rest of the brokerage bunch appears to be of the same mind.
According to Thomson/First Call, 13 of the 27 analysts following TEVA stock rate the shares a “hold” or worse, with the 12-month price target of $40.65 representing a modest 10% premium to yesterday’s close.
The lack of upgrades and/or price target increases following the recent raft of bullish headlines and rise in TEVA stock is telling, and should concern bullish Teva investors.
There is also a lack of bullish activity among TEVA options traders. These typically speculative traders have not been lured to the bulls’ side in the past week, with the March put/call open interest ratio coming in at a neutral-to-bearish reading of 1.13. In other words, despite reasons to speculate on a TEVA run, options traders continue to have reservations about the stock.
That said, implieds are pricing in a potentially sizable move of more than 6% for TEVA stock through March expiration. As a result, the upper bound lies at $38.76, while the lower bound rests at $34.24. A rally would push TEVA just north of resistance at $38, but the shares would have to hold this level in order for a breakout to be a bullish indicator. Meanwhile, a drop to $34 would test key short-term support for the shares.
2 Trades for TEVA Stock
Bear Put Spread: With each bump in the TEVA stock price being met with selling pressure, I’m inclined to fade the current rally. Traders looking to side with the bears might want to consider a 31 March $35.50/$36 bear put spread. At last check, this spread was offered at 18 cents, or $18 per pair of contracts. Breakeven lies at $35.82, while a maximum profit of 32 cents, or $32 per pair of contracts, is possible if TEVA stock closes at or below $35.50 when March options expire.
Bull Put Spread: If you’re not sold on a TEVA stock selloff, then playing technical support may be more in line with your risk tolerance. Guidance may be enough to keep the shares afloat for the time being, leading to a short-term sideways trend that could keep an outright bearish play from turning a profit. Being cautious, the $34 region has growing technical support and has a good chance of keeping a 31 March $34 put sell out of the money.
At last check, this put was bid at 41 cents, or $41 per contract. As long as TEVA stock trades above $34 through March expiration, traders pursuing this strategy will keep the $41 premium. If TEVA stock trades below $34 ahead of expiration, however, you could be assigned 100 shares for each contract sold at a price of $34 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.