In the last five years, AbbVie (NYSE:ABBV) stock is up 76%, which is impressive. But over the past 12 months, it has been a struggle. Coming into today, AbbVie is down 5% in a year. But this is not all due to company-specific problems.
So far, 2018 has been a tough year for stocks in general. The fundamentals, although very strong, are under attack from headlines about tariff wars especially between the United States and China. And this week on Tuesday we had a panic-sell attack in the stock markets due to a sharp drop in the bond yield curve.
Moreover, the U.S. Federal reserve is in a rate hike cycle. Up until last week, consensus had been that they were intent on raising the short-term rates regardless of the way that economy has started to soften. If they keep on this trajectory and as long as long-term rates are rising like they are, the yield curve would soon more fully invert, thereby making it unprofitable for banks to lend.
The result of this would be a sharp tightening in the money flow that would cripple growth. This would bring a recession towards the end of 2019. So needless to say that there are headline risks that have stifled ABBV stock.
A Chance to Get Into ABBV Stock
All summer, investors shied away from the stock. Even while the Energy Select Sector SPDR ETF (NYSEARCA:XLV) was rallying, ABBV was falling. But there’s still an opportunity in the stock right here and now.
The stock sells at a 17x price-to-earnings ratio, which is in line with its competitors and cheaper then say apple. So if there was a discrepancy in value earlier in the year, the relative under-performance corrected it over this swoon.
So fundamentally speaking, owning shares at these levels for the long term is not likely to be a financial debacles. I’m confident that if markets are higher in the future, then AbbVie stock will be as well.
The good news is that the stock reacted positively to the earnings last month. It has since mounted a $15 rally, which is about 20% off the lows. This happened during times when reactions to even great earnings reports have been very bearish — the most notable example is Netflix (NASDAQ:NFLX) falling more than 20% on a strong beat-and-raise. So this proves that there is risk appetite for ABBV stock.
The short-term opportunity today is from a technical perspective.
Even though Tuesday’s price action was brutal, down 3% on the day, the stock still lingers around a neckline for a potential inverse head- and-shoulders. These are bullish patterns and in this case it could have as much as $10 upside potential. It is important but the next few days the stock doesn’t fall below $85 per share — otherwise it would potentially develop an opposite and bearish pattern that would retest the lows.
The headline threats have abated quite a bit. The selling on Tuesday was panic-like an and a mechanical reaction to currency and bond markets. Today again markets are freaking out over the arrest of the Huawei CFO, which threatens the Sino/U.S. tariff truce agreement. So this is an opportunity for traders to initiate a position on this dip to hold for the midterm. Short term success will depend on the outcome of this battle of the necklines between a $85 and $95 per share in AbbVie stock. But the long-term reward will be from the company fundamentals.
There is a psychological attraction to round numbers — in this case to $100 per share. But I also expect resistance if and when it gets there. That was the scene of many prior rally failures, so the bulls will have some hard work to do there.
I consider this trade as medium conviction simply because it’s a purely technical trade. However, for the long term I am confident that it turns out to be a profitable investment even if it first fails here, as long as the portfolio is not already heavy with healthcare stocks. A balanced portfolio should include stocks like ABBV, especially in a nervous market.
The macro economic environment still favors the bullish thesis but we are starting to see cracks. As long as the U.S. and China come to terms over the next 90 days, and as long as Federal Reserve Chairman Jerome Powell sticks to his word and doesn’t willingly invert the yield curve, then I expect that companies will continue to prosper for months to come.
The next few days are critical. In spite of all the ups and downs this year and the bearish sentiment, markets are still near all-time highs, so there’s plenty more froth to shed if the bad news flow continues. Therefore I only risk what I can afford to lose.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.