Regulatory Warnings Create Buying Opportunities: Big Pharma Edition

Stocks never move up in a straight line. One reason is profit-taking. In a bull market like this, that’s a bit rare. But other events can also temporarily weigh on a stock’s long-term uptrend. One big event is a regulatory warning.

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  • While big tech names sometimes take a one-day dive as some agency announces a record fine, or even a bank, which have collectively paid billions in fines, big pharma is the latest industry to come under fire as well.

    Consider AbbVie (ABBV), a company that the FDA issued a warning against last week on one of its key arthritis drugs. Shares shed nearly 10 percent on the news of the warning, but have already started to move higher as a warning isn’t the same as an order to stop production.

    Many analysts see the stock’s drop as an overreaction as well.

    The drop has cut into AbbVie’s market-like return, so now shares have underperformed the S&P 500 by 8 points even as earnings and revenue have been strong in the past year.

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  • Action to take: The selloff is likely a decent entry point for those interested in a big pharma stock. Besides solid metrics like trading at 10 times forward earnings, shares yield about 4.6 percent right here, and have had some modest growth over the years.

    For traders, betting on a rebound from last week’s selloff is a solid play. The January $115 calls, last going for about $4.30, are a near-the-money trade likely to move back in-the-money in the coming months. Look for high double-digit returns with this trade.

     

    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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