This week I want to take a bullish position in the underperforming pharmaceutical sector with Apellis Pharmaceuticals, Inc. (NASDAQ:APLS).
My indicators are giving bullish readings for the third week in a row, although they have weakened a bit from last Friday.
While the rally we’ve seen from the March low has been powerful, some areas of the market have rebounded into what I consider to be overvalued territory considering the negative impact on earnings I’m anticipating.
APLS isn’t directly tied to the treatment of COVID-19, however, according to Zacks Research, analysts’ earnings estimates for APLS were revised higher in early April. Though the revision was a decrease in expected losses per share, any revision higher is a good sign.
As one of the stronger pharmaceutical stocks, APLS is a good way to enter a sector I think has underperformed.
Health Care and Pharmaceuticals
The few areas where demand is still strong include health care, technology and consumer staples. Let’s look at health care, as represented by the Health Care Select Sector SPDR Fund (NYSEARCA:XLV).
Daily Chart of SPDR Health Care ETF (XLV) — Chart Source: TradingView
You’ll notice that XLV is only off from its all-time highs by about 5% after forming a very sharp V-shaped bottom in March. While I do think that this is a great sector to be in for the long term, I think traders are overly optimistic about the earnings picture for the remainder of the year.
If you look at the chart of the pharmaceutical sector, as represented by SPDR S&P Pharmaceuticals ETF (NYSEARCA:XPH), you can see that this important sector hasn’t seen the same enthusiasm as the closely related health care sector.
Daily Chart of SPDR S&P Pharmaceuticals ETF (XPH) — Chart Source: TradingView
APLS is one of the top-performing stocks in the sector, and I think the short-term interest in the company makes it a good target for a bullish call option.
Trading Above Moving Averages
APLS, unlike its sector, is trading above its 50- and 200-day moving averages, which is a good sign of its strength. I also think that, while investors are overly optimistic about earnings in general, the fact that APLS’s expected loss hasn’t dampened bullish interest is positive.
Daily Chart of Apellis Pharmaceuticals, Inc. (APLS) — Chart Source: TradingView
In the chart above, you can see that the stock ran into resistance at around $38 in intraday trading yesterday, which gives traders a chance to enter this bullish position. The stock could retest old resistance at $30 to see if it will act as support, and if support holds, I think investors will continue pushing APLS higher.
I’m setting a strike at $45, but you don’t have to wait for this option to be in the money to take a profit.
Buy to open the Apellis Pharmaceuticals, Inc. (APLS) June 19th $45 Calls (APLS200619C00045000) at $1.30 or lower.
InvestorPlace advisor Ken Trester also brings you Power Options Weekly, which delivers 5 new options trades and his latest trading advice to you each Friday. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.