How 3 Overloved Drug Stocks Could Land In Hot Water

Drug stocks have been underperforming of late, but analysts remain very bullish

Kirra Fedyszyn
Dec 7, 2016 at 12:39 PM
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Drugmakers been having a rough time lately, despite a brief post-election pop for the sector. In fact, biotech and drug stocks have consistently ranked at or near the bottom of our internal Sector Scorecard for several months. While a loss for Hillary Clinton in last month's presidential election was initially seen as a boon for the these stocks, given her price-gouging tough talk, it has since become apparent that Donald Trump's victory won't necessarily take the pressure off. In fact, in an interview with Time, which named the president-elect "Person of the Year," Trump said, "I'm going to bring down drug prices," adding, "I don't like what has happened with drug prices."

The comments having been hitting the drug sector hard so far today. In fact, the SPDR S&P Biotech ETF (XBI) has dropped 5% to $61.14 -- its lowest level since Election Day. Among specific stocks also slumping are Gilead Sciences, Inc. (NASDAQ:GILD), Mallinckrodt PLC (NYSE:MNK), and Allergan plc Ordinary Shares (NYSE:AGN) -- all of which are surrounded by a surprising amount of optimism on the Street and in the options pits.

Starting with GILD, the shares have surrendered 30% over the past 12 months, and have been facing downward pressure from the descending 100-day moving average. In fact, this trendline has largely limited the stock's upward moves since August 2015. Off 0.1% at $72.42 today, GILD is seated just above its early November two-year low. And it could continue to be a bumpy road in coming weeks, considering the stock has historically been among the worst performers for the month of December.

Despite this, 13 out of 21 analysts maintain a "buy" or better rating on the equity, and not one rates it a "sell." Plus, the average 12-month price target sits far overhead, at $95.74. What's more, GILD is among the list of 21 S&P 500 Index (SPX) stocks MarketWatch called out for analysts' extremely high expectations for the next 12 months.  Considering the security's technical performance, a round of downgrades and/or price-target cuts appears likely.

Brokerages aren't the only bullish bunch, either. Gilead Sciences, Inc. (NASDAQ:GILD) has seen its calls bought to open over puts at a faster-than-usual clip in recent weeks across the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). The stock's 10-day call/put volume ratio currently stands at a top-heavy 3.54 -- just 7 percentage points from a 52-week peak. A capitulation among these bullish holdouts could result in headwinds.

Turning our attention to MNK, the stock is down 4% at $51.55 today, earlier tapping a new two-year low of $50.72. So far in 2016, the shares have dropped almost 31%, and scathing comments from short seller Citron Research have done nothing to help -- nor has this morning's price-target cut to $72 from $115 at Oppenheimer. Still, 13 brokerage firms call MNK a "buy" or better, compared to a single "hold" and not one "sell" opinion. What's more, the stock ranks at the top of MarketWatch's aforementioned list, based on its implied 12-month upside potential of 56%.

Meanwhile, MNK holds a 10-day call/put volume ratio of 1.26 at the ISE, CBOE, and PHLX -- just 2 percentage points from an annual high. This call-skew is echoed among near-term speculators, too. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.83 sits in the low 12th percentile of its annual range. An unwinding of this optimism could weigh on the shares.

That said, there are some signs skepticism may be building. Short interest on Mallinckrodt PLC (NYSE:MNK) surged by nearly 30% during the most recent two-week reporting period. In fact, it's possible some of the aforementioned call buyers were actually short sellers in disguise, hedging their bearish stock positions with options.

Finally, AGN is off 1.4% at $188.25 today, widening its year-to-date deficit to nearly 40%, and coming within striking distance of its late-November two-year low. Nonetheless, more than three-quarters of covering analysts call the stock at least a "buy," without a single "sell" rating in sight. Plus, with an average 12-month price target of $264.84, the implied upside potential registers at an astounding 41%. If that's not enough, Piper Jaffray earlier lifted its price target to $202 from $200.

AGN calls have been unusually popular of late, too. The security's 10-day ISE/CBOE/PHLX call/put volume ratio sits higher than 96% of the past year's readings, at 3.08. But like MNK, ulterior motives may be at play. Allergan plc Ordinary Shares (NYSE:AGN) has seen an influx of bearish attention in recent weeks, with short interest climbing by a whopping 162.7% in the most recent reporting period. Still, these pessimistic positions represent a relatively moderate 7.3% of AGN's available float. In other words, the stock appears vulnerable to additional short selling and/or negative analyst attention.

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