Merck & Co., Inc. Stock Could Still Soar Another 10% From Here

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MRK stock - Merck & Co., Inc. Stock Could Still Soar Another 10% From Here

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While Merck & Co., Inc. (NYSE:MRK) had gotten off to a modest pace to start the year, the last few trading sessions have been rather explosive. Specifically, on Jan. 16, MRK stock rocketed higher by about 6%. That move followed big gains in the prior few sessions leading up to Wednesday. All told, Merck stock is up more than 10% this year.

So what got MRK stock moving higher, significantly outpacing the rest of the market and its sector? Positive Phase 3 results on its Keytruda study for first-line non-squamous non-small lung cancer came in ahead of its competitor Opdivo. Opdivo is an immunotherapy treatment from Bristol-Myers Squibb Co (NYSE:BMY).

With MRK stock rallying so hard on this positive news, many are wondering there is still time to buy.

Valuing MRK Stock

Despite the big move higher on the hope of increasing revenue via Keytruda, MRK stock is not wildly expensive. Investors who view the stock on a trailing price-to-earnings (P/E) ratio basis will balk at its price. It has a P/E ratio of more than 60 following the recent spike in the stock price.

However, it’s imperative that investors give Merck more than a glance when they look at its stock. On a forward P/E basis, MRK stock trades at just 15 times its next 12 months of estimated earnings.

While sales growth forecasts of 1.1% in 2017 and 1.9% in 2018 are far from robust, it’s hard to argue that Merck is expensive. Throw in the fact that it pays out a 3.2% dividend yield, and Merck becomes even more attractive.

Although the valuation is attractive, there are some concerns. Mainly, free cash flow and operating cash flow have plunged over the last year. While I expect these metrics to rebound going forward, they’re worth pointing out.

Trading Merck Stock

The valuation and dividend yield is nice, but what about the stock chart? My biggest issue with MRK stock is how far it’s moved from levels we could have bought at six weeks ago.

chart of MRK stock price
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Source: Chart courtesy of StockCharts.com

However, the past is the past. Short of a huge disappointment, Merck stock won’t be back in the low-$50s any time soon. The positive side of this? I would rather buy a stock where the catalysts are positive and the stock has bullish momentum than vice versa.

Take Gilead Sciences, Inc. (NASDAQ:GILD) for instance. Many loved it because of its valuation and yield. But without some positive mojo, the stock was dead money for a long time.

$60 is a pivotal level for Merck. It served as support throughout 2017 before disappearing in late October. Absent a disappointing development, I expect this level to again act as support. Further, the 200-day moving average is near this level, meaning it too could act as additional support.

On the upside, a target of $68 to $70 seems reasonable, given that upper band of resistance is projecting higher. That said, MRK stock topped out three times between $64.50 and $66 in 2017. It could again find resistance in this area.

With that in mind, how do we trade MRK stock? Aggressive traders can buy MRK stock here, despite the overbought nature of the stock (blue circle). Using a stop-loss below $60 support will help keep losses small.

Conservative investors can consider a long position in MRK stock should it pullback to ~$60 and find support. Not only would this be a healthy development, but it would allow Merck stock to work off its overbought condition.

The Bottom Line on MRK Stock

Between the two strategies, I personally prefer the latter given that we missed the initial pop. Additionally, we’re not sure on the potential upside, so buying at lower prices would improve the risk-reward.

Merck stock has a low valuation, a good yield and a solid chart setup. While there are some issues, mostly tied to its recent cash flow, I do like MRK stock near current levels. Its improving fundamentals and positive Keytruda data are promising for the future and gave shares a much-needed spark.

Let’s see if MRK can continue with the recent momentum and move higher over the next few days. Or let’s see if it pulls back and finds support. For the record, another stock I like near these levels is Celgene Corporation (NASDAQ:CELG).

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2018/01/merck-stock-could-still-soar-another-10-percent-from-here/.

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