Valeant Pharmaceuticals Stock May Be Screaming 'Buy'

VRX shares have been higher every single time after the last four signals

Aug 3, 2017 at 2:46 PM
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After touching $8.32 in April -- its lowest level since late 2008 -- Valeant Pharmaceuticals Intl Inc (NYSE:VRX) stock more than doubled in short order, peaking north of $18 in July. More recently, however, VRX stock has pulled back to trade at $15.78, down 4.1% on the day, yet the equity's dip could present a prime buying opportunity, if past is prologue. Below, we'll take a look at Valeant stock's performance on the charts, and explain why VRX options buyers may want to take notice ahead of earnings next week.

VRX Stock Pulling Back to Notable Trendline

Valeant stock is now within one standard deviation of its 40-day moving average, after a lengthy period above this trendline. According to data from Schaeffer's Senior Quantitative Analyst Rocky White, previous pullbacks to this moving average have marked buying opportunities, with the stock higher 100% of the time both one week and one month after the last four pullbacks. VRX stock has averaged a one-week gain of 2.56% after similar dips, and a one-month gain of 8.79%. Another 8.79% rally from current levels would place Valeant shares around $17.17 -- north of former resistance in the $17 zone.

valeant pharmaceuticals stock chart

Valeant Options May Be a Bargain

As alluded to earlier, Valeant Pharmaceuticals will report earnings next week -- on Tuesday, Aug. 8, to be specific. The stock rocketed more than 24% higher the day after its May earnings report, and has averaged a one-day post-earnings move of 19.8% in either direction, going back eight quarters. Going by Valeant's at-the-money implied volatility data, options traders are pricing in a smaller-than-usual one-day earnings reaction of 15.4% this time around.

However, VRX stock has a history of exceeding options traders' volatility expectations, as the security's Schaeffer's Volatility Scorecard (SVS) sits at a lofty 92 -- an appealing factoid for would-be premium buyers. Plus, even with Valeant earnings on the horizon, the shares' Schaeffer's Volatility Index (SVI) of 75% is higher than just 28% of all other readings from the past year, suggesting VRX's near-term options remain reasonably priced from a historical volatility standpoint.

Options Traders, Analysts Have Opposing Expectations for VRX Stock

Valeant options buyers have been upping the bullish ante at a rapid-fire rate lately. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day call/put volume ratio of 4.48 indicates traders have bought to open more than four VRX calls for every put in the past two weeks. Further, this ratio is higher than 99% of all others from the past 12 months, demonstrating a much healthier-than-usual appetite for long calls over puts lately.

On the other hand, while VRX shares have outperformed the broader S&P 500 Index (SPX) by more than 32 percentage points in the past 40 sessions, analysts remain skeptical. In fact, just three of 11 analysts deem Valeant stock worthy of a "buy" or better rating. Should the pharmaceutical concern once again exceed earnings expectations next week, a round of upgrades could help VRX extend its recent journey higher. 

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