If you can have as many positive indicators in your favor when trading, then your probability automatically goes up when you finally begin to trade the stock. Teva Pharmaceuticals (NYSE:TEVA) looks attractive at these levels not just for its fundamentals but also for its volatility and general fundamentals of the biotech sector. I have written in previous articles that I believe the biotech sector is in its initial innings of a new bull market. Why? Well many believed this sector was left for dead when it underwent a huge decline since the middle of last year. However the sector found a hard bottom a few weeks ago and my indicators are telling me this bottom on the (NYSE:IBB) index is going to hold.
Furthermore Teva hasn’t exploded out of biotech’s hard bottom (see chart) this month which illustrates to me there is plenty more room to the upside. However the important factor is that the stock has bounced so better returns should be around the corner as long as biotech keeps rallying.
In terms of the companies fundamentals, the big question surrounding this stock at the moment is its impending purchase of Allergan’s (NYSE:AGN) generics unit which I’m predicting will be a success. Although there are companies with much higher risk/reward profiles in biotech, Teva’s financial leverage is under control which definitely limits its downside. In fact, the company currently has a debt to equity ratio of 0.32 which means it can continue to produce costly drugs such as bio-similars to remain competitive. Other biotech companies are solely relying on their pipelines but not Teva. Competition is fierce in the generics segment of this industry which is why Teva’s ongoing cost cutting measures must be upheld to ensure the company can continue to fend off growing competition.
In terms of trading this company, the stock has been range bound for the past 5 years. In fact Teva has the same price to book ratio and sales multiple as it did 5 years ago which smells opportunity to me. Why? Well look at what the biotech ETF has returned over the past 5 years compared to Teva. Furthermore even if the stock remains range bound, this suits option sellers especially if the stock is trading with high implied volatility
At the moment Teva’s IV is well above 30% which is well above its averages. If a trader thought that the stock would continue to trade range-bound, one could sell a strangle (undefined risk) or an iron condor (defined risk) to bring in extra premium every month. Personally I would favor bullish strategies such as short puts or short credit spreads. Why? Well I thing the downside is limited here and even if you were “put” stock, I believe the biotech tailwind trend would eventually rescue a long stock position.