History says beware one blue chip before earnings
While the broader S&P 500 Index (SPX) is on pace for its best month since October 2015, several stocks could take a breather in February, if past is prologue. Below are the 25 worst stocks to own in the shortest month of the year, looking back 10 years, with Merck & Co, Inc. (NYSE:MRK) at the top of the list ahead of earnings tomorrow.
In order to make the list -- compiled by Schaeffer's Senior Quantitative Analyst Rocky White -- stocks had to have at least eight years of data. As you can see, MRK shares have struggled in February, ending the month higher just twice in the past decade. On average, the big-cap pharma stock has dropped 2.04%.
While most stocks are pacing for big January gains, MRK shares are set to end the month 4.1% lower. Coincidentally, that would mark the biggest monthly loss for the shares since last February. Since touching an all-time high of $80.19 in early December -- a roughly 50% gain from its April low of $52.83 -- the equity has backpedaled to test support in the $72 area, marking a channel of lower highs along the way. Merck stock was last seen trading at $73.16, down 0.3% on the day.
Merck is expected to unveil its fourth-quarter earnings before the open tomorrow, Feb. 1. The equity has moved lower the day after its last five earnings reports, including a 2.2% drop after last February's report. On average, MRK has moved 2% the day after its last eight earnings reports, regardless of direction. This time around, the options market is pricing in a slightly bigger-than-usual 3% swing.
As for direction, bearish bets have been more popular than normal heading into Merck earnings. The stock's 10-day put/call volume ratio of 0.73 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is in the 85th percentile of its annual range. While this tells us that more MRK calls have been bought to open over puts on an absolute basis, the high percentile indicates option buyers have been more put-heavy than usual in the past two weeks.
Should the blue chip fail to follow the lead of sector peer Pfizer (PFE), a disappointing earnings showing could spook a few analysts, though. Despite the security's underperformance of late, MRK boasts seven "buy" or better ratings, compared to two "holds" and not a single "sell."