AmerisourceBergen (NYSE:ABC) announces earnings on the 4th of May where $1.71 will be the number looked for. I see this stock undervalued compared to its historic means. At present, the stock is trading with a price to book ratio of 8.3 and an earnings multiple of 13.6 which are well below to what we are used from from this stock. The stock just seems to be bouncing out of oversold conditions at present and sentiment is near record lows. Implied volatility in the stock is rising as earnings approach which is why probably the best course of action here is to get long before the shares rally out of these present lows.
This I believe is a mistake option traders can make from time to time. Although volatility works against the option seller as a stock approaches earnings, sentiment can quickly rise if the price of the shares rally aggressively before earnings. We aim to pick stocks that are selling at price extremes and use volatility and sentiment in our favor.
Source : Sentimentrader.com
What investors need to focus on here is that the pharmaceutical industry is not going to decline any time soon. Just look at the amount of large caps either paying obscene acquisition prices or are scouring the marketplace for potential candidates. Furthermore the sheer scale of the three major pharmaceutical distributors ensure that this market is pretty much tied up to the extent that it would be very difficult for new entrants to break in here. This means AmerisourceBergen holds a distinct competitive advantage. The perceived risk is that the US government over time will gain more control over the prices of drugs. This could potentially brings down AmerisourceBergen’s margins but I feel we are light years from a scenario like this unfolding. Big pharma has probably the most powerful special interests in the world that thwart any potential fundamental government intervention. This is why I remain interested in the likes of AmerisourceBergen & McKesson Corporation(NYSE:MCK)
So does one wait for higher option prices before putting on a volatility trade before earnings or just getting long now ? Potential trade-setups would be covered calls, selling naked puts or put spreads or the classic Jade Lizard for the neutral to slightly bullish trader.