Drug Stock Flashes Buy Before Earnings

ZTS call options could be a steal right now

Nov 4, 2019 at 1:39 PM
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Drugmaker Zoetis Inc (NYSE:ZTS) will report earnings before the open this Thursday, Nov. 7. While the shares of ZTS have already added more than 46% so far in 2019, and touched a record high of $130.20 in mid-October, the stock is once again flashing a historic buy signal -- suggesting more upside could be in store before year's end.

Specifically, Zoetis stock has spent the past few months churning beneath the $128-$130 region, and is now back within striking distance of its 70-day moving average. This trendline has emerged as support for ZTS in 2019, and over the past three years there have been 10 pullbacks to the moving average. After these dips, the security went on to average a one-month gain of 6.5%, and was higher every time, per data from Schaeffer's Senior Quantitative Analyst Rocky White.

From Zoetis stock's current perch of $125.23, another 6.5% uptick would place the shares north of $133 -- in uncharted territory. What's more, the stock's Schaeffer's Volatility Index (SVI) stands at 28%, just above its two-year average of 21.2%. If the SVI holds steady around its two-year average over the next month, White's modeling shows that an in-the-money ZTS call option could potentially return 171% on another expected bounce off its 70-day trendline.

ZTS stock chart nov 4

The pharmaceutical company also has history on its side when it comes to earnings. ZTS shares have moved higher the session after seven of the last eight earnings releases, including a one-day jump of 7.6% after earnings in August. The last time ZTS moved lower after earnings was in May 2018. On average, the equity has swung 4.9% the day after the last eight earnings releases, regardless of direction.

Should Zoetis once again report well-received earnings on Thursday, a flood of upbeat analyst attention could fuel the security higher. Currently, half of the 14 analysts following ZTS maintain tepid "hold" opinions, and the consensus 12-month price target of $136 is not even 9% above the stock's current price. As such, there's plenty of room for analyst upgrades and price-target hikes on the heels of another earnings win.


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