Friday, May 11, 2007
Amerisourcebergen and the 'ABC' of investing
Applying skills in both technical analysis and psychology,
Chris Johnson notes, “Our Behavioral Valuation model continues to signal that the market remains in position to move higher.”
Here, the editor of Insightful Investor looks at the movement of the market “crowd” and what it suggests for future action, as well as a current favorite stock play, pharmaceutical products distributor Amerisourcebergen (NYSE: ABC).
“The essence of our approach to forecasting market moves is detecting when expectations are out of alignment with the underlying fundamental and technical pictures.
“We follow these expectations by watching investor behavior via a number of quantified measures. The result is the ability to detect when investors are likely to move money in and out of the market to reach an equilibrium or balance between their expectations and stock prices.
“We’re now in the process of seeing exactly how Behavioral Valuation plays out in a bullish scenario. Investors now appear to be rushing to buy stocks to avoid feeling left out of the rally, a sign that the Behavioral Valuation of stocks was discounted to actual values.
“Now, like auction buyers who just realized the true value of a trinket on the block, investors are bidding the price of stocks higher. That means that there’s an increased chance that we are ready to see the market’s rally take stocks to the next level.
“Many investors and traders have noted the market’s recent resilience. The number of days that the Dow and other indices have moved lower through the day, only to close in positive territory, is impressive.
“We refer to this situation as the market having a ‘built-in bid’ on stocks. The term refers to the fact that there are investors willing to step up and buy on a small drop in prices. This is bullish for the intermediate term since it indicates that the demand for stock is greater than supply.
“Meanwhile, among individual stocks, we note that the pharmaceutical group has become attractive again, as the big-name companies are coming back to life after a multi-year hibernation.
“While big pharma may have taken a rest, one related group that hasn’t is those that distribute their wares. One such company is Amerisourcebergen Corp., which has numerous distribution arms that continue to thrive.
“Fundamentally, ABC is one of the industry’s leading companies. The company has a history of beating analyst expectations by an average of 8.6% over the last four quarters, and the technical pattern in the stock has been strong as a result.
“The stock’s performance is best described as slow and steady as it trades above its supportive technical trendlines. Despite the strength in fundamentals and technicals, ABC’s sentiment picture includes pessimism ahead of earnings.
“First the option activity, which is now showing a lot of pessimism ahead of their earnings announcement on Wednesday. The ratio of puts traded to calls has jumped from below 2.0 to the 9.0 level.
"This suggests that the options crowd has low expectations for the stock ahead of earnings. Similarly, the analyst recommendations on the stock are unimpressive, with only two of the 11 analyst covering the stock issuing ‘buys.’
"Our bottom Line: We recommend buying and holding shares of ABC. The stock appears poised to continue its show of technical strength and thus is a good addition to the portfolio.”
posted at 8:04 AM
