Friday, June 5, 2015

VRTX Analysis

The pharmaceutical research lab Vertex Pharmaceuticals Inc. (VRTX), headquartered in Boston, Massachusetts, first came to my attention as a story stock.

An experimental drug for treatment of cystic fibrosis, Orkambi, received a recommendation in favor of regulatory approval from a panel of outside advisors. It is a big step toward providing more effective treatment of about half of the 30,000 people in the United States who are dealing with this devastating disease. Bloomberg reported on the recommendation. A pdf of the 125-page report may be read here.

For traders, pharmaceutical research is a speculative arena. Neither the financials nor the charts can provide advance warning of the future course of the stock price. Vertex's future lies in the hands of the vagaries of the laboratory, the quirks of the human body and the informed whims of the U.S. Food and Drug Administration.

In this analysis I'm looking at VRTX as a longer-term speculative play.

[VRTX in Wikipedia]


Despite the caveats I've stated above, the chart does open a window into the degree of optimism traders and investors have about the company's prospects. And oh boy, are the optimistic!


Click on chart to enlarge.
VRTX 15 years weekly bars (left), 30 days hourly bars (right)
VRTX has been rising for a very long time. The trend has carried the price from $7.83 in 2003 to $137.50 this spring, its most recent high.

Elliott wave analysis does a poor job of subdividing the rise. The momentum is so strong that there is no clear distinction between the levels of the fractal Elliot wave structure.

My analysis on the chart above shows one way of analyzing them, which shows wave 3 to be near or slightly past its end, to be followed by a correction of the rise form 2008. But I could just as easily frame it so that wave 5 is ending, signaling a correction of the rise from 2003.

In either case, the correction to come will be a major, long-term event for VRTX. Of course, given the difficulties of the chart, it might well continue to subdivide, extending the life of the uptrend for months and perhaps even years to come.

Elliott is of little help on this chart. The best to be said is that VRTX has been rising for a very long time, and the future is murky.

Assuming wave 3 peaked on April 23, the ensuing wave 4 correction appears to be in the 2nd wave portion of a movement of far lower degree, with a sideways bias.

The Company

Analyst enthusiasm is negative, coming down collectively at a -17% enthusiasm rating.

The company reports 59% loss on equity, with debt running at 31% of equity.

Earnings have been profitable in one of the past 12 quarters, the 4th quarter of 2013.

Two quarters have produced upside surprises. The other 10 all surprised to the downside.

The earnings yield is negative at -2.33%, compared to a positive 2.39% yield on 10-year U.S. Treasury notes. VRTX pays no dividend.

Since the company has no earnings, it is impossible to assess a "fair" price implied by earnings growth estimates.

The stock is selling at at a huge premium to sales. It takes $51.52 in shares to control a dollar in sales.

Institutions own 95% of shares.

VRTX next publishes earnings on July 27.


VRTX on average trades 1.1 million shares a day and supports a wide selection of option strike prices spaced $5 apart, with open interest running in the three figures.

The front-month at-the-money bid/ask spread on calls is 57.1%, compared to 0.6% on the most traded symbol on the U.S. markets, the exchange-traded fund SPY.

Options are trading at a slow pace today, with calls running at 29% of their five-day average volume and puts at 19% of average.

The Trade

The bid/ask spread on the options is five times the maximum that I'm willing to pay. So any trade on VRTX would have to be as shares, where the spread is 0.1%.
Decision for My Account

I'm always up for a good speculative play for the longer-term holdings in my portfolio. Such companies often don't have earnings, and they're often priced quite high.

On the positive side of VRTX, I look at the high level of institutional investors, who have a longer-term view of things. I also look at the runaway rise in stock prices, which means a lot of decisions are being made in favor of VRTX, and the highly liquid options grid.

On the negative side, I look at the unenthusiastic analyst opinion, which has a shorter time horizon than institutions have. It tells me that Vertex may have a bright financial future, but not in the next year, necessarily.

The chart makes a case for waiting to open a position. VRTX is in a downward wave correcting a portion of the rise from $13.84 in 2008. The Elliott wave count suggests caution before getting in. The correction, after all, is in its early days.

The counter-argument points to the outside panel's approval of the new drug, Orkambi as making regulatory approval and a resumption of the stock's price rise more likely. However, I note that the approval announcement in May, while prompting a 7% stock rise, failed to boost the price beyond the sideways range that has been running since the end of April.

It is important to note that corrections themselves are composed of uptrends and downtrends. They are not structured as unrelenting declines. An uptrend within this long downtrend might well provide an opportunity for a trade.

However, at this point, that opportunity has not yet arrived. I'm not willing to open a bullish stock position in VRTX. I intend to keep an eye on it, and when the moment does arrive, in the form of a break above the sideways trend, then I'll give it another look. The trend so far has produced an upper boundary of $131 plus change. I'll be looking for a persistent uptrending break above that level.

-- Tim Bovee, Portland, Oregon,  June 5, 2015


Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.


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Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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