Last year’s extreme sentiment fears have abated and now the equity markets are back near all-time highs. This includes stocks like AstraZeneca (NYSE:AZN) as it set a new high late last month. From that standpoint, this is not an obvious entry point into AZN stock, but whether you should buy the stock also depends on a few other factors.
Those who want to own AZN shares for the long term can afford to ignore short-term downside risk. But for most other investors who prefer to start an ownership position into a stock in the green should be slightly more surgical than just jumping in at any time.
AZN stock is on a tear up 11% in 12 months. But the company will report earnings on April 26 and those events are wild. So this makes buying the stock now a short-term binary bet. Reactions to earnings scorecards are usually more to do with expectations than the actual value of a stock.
Before you label me a hater, my caution for AstraZeneca stock here is not a dis against the company itself or its prospects. I am merely concerned with buying into a stock that is not likely to fall soon thereafter. Looking back on its prior reactions to earnings, they are split.
Last quarter, the stock spiked drastically on the results, which left a giant open gap in the chart. Although this does not happen all of the time, Wall Street usually likes to fill these gaps.
Since the spike to all-time highs, AZN stock has been drifting lower and testing recent support. If it loses $40 per share, it risks triggering a bearish pattern that would close the gap below. Although this is not a forecast, it is a scenario that could unfold here and investors need to be aware of it.
The good news is that $39 per share is a mid-term pivot level and those tend to lend support on the way down. These are zones that the bulls and bears find interesting, so they will fight it out and create price congestion.
How to Approach AZN Stock Now
So far my reservation to owning the shares immediately has been technically based. Fundamentally, AZN stock is not cheap as it sells at a price-to-earnings ratio of 47. This is more than three times as expensive as Bristol-Myers Squibb (NYSE:BMY) and twice as expensive as Apple (NASDAQ:AAPL) … to draw absolute and relative comparisons, respectively.
Moreover, healthcare and biotech stocks are back in the sights of the political rifles. This is the only current bipartisan consensus topic. Both Democrats and Republicans want to vilify and persecute the drug companies. The rhetoric of both sides involves bringing legislation that would bring down the price of medicine and change the current Health Care Act.
These are nervous times on Wall Street. The S&P 500 has been on an extended run since the December crash and that makes investors nervous. Almost everyone I hear in the media suggests that traders are ready to sell at the first sign of trouble. So the prevailing idea is that we’ve come too far too fast. For some reason, they didn’t say that on the way down, when last year we fell even faster and farther.
But for now, we have to respect the collective and be cautious. This is not an obvious time to load up on new positions of AZN stock, even if it means I would miss out on a few upside dollars if it rips. And for those who already own AstraZeneca stock, it’s not an alarm to sell out of the position. Furthermore, the options markets offer many ways I can temporarily defend my shares by selling covered calls or buying puts. Doing both would be a dollar neutral strategy.
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.