Cardinal Health (NYSE:CAH) is now down more than 23% year to date which may mean we have opportunity brewing in this stock. We already are long other principal pharmaceutical distributors and doubling down on what appears to be an oversold sector invariably brings more risk to the table. In saying this, Cardinal Health after the slide in the share price post Q1 earnings is now trading with an earnings multiple of 16 which is 40% down from its five-year average of 27.3. Furthermore the stock has been left for dead sentiment wise which is pretty rare for companies with strong competitive advantages in their respective sectors.
Source : Sentimentrader.com
The change at the top with Mike Kaufmann coming in to take the helm probably didn’t help the optimism, but Cardinal Health’s problems at present seem to be stemming from outside factors and not internal structural issues. For example, we have seen generic pricing come under pressure across the board among the three main distributors. Cardinal just doesn’t seem to have re-positioned its business model to the extent of its main rivals. What we do know is that sentiment levels and price have rebounded nicely in the likes of AmerisourceBergen Corp.(NYSE:ABC) recently. Will the same happen to Cardinal? Probable in my opinion. I always like to look though at the long-term financials of a company to see the main trends of the company over a decade, for example. Here’s how Cardinal’s key metrics check out over the past 10 years.
As we can see from the table above, the two main key metrics that haven’t made the grade are the “share price history” and “resistant to recessions.” However because the period of the great recession falls into our analysis, it is understandable why the metrics focused on reasons share price performed poorly. From January 2010, the share price is up over 70% so I’m prepared to give Cardinal some leeway here. In fact, if we look at total returns since 2007 which obviously include dividends, then Cardinal actually delivers a positive annualized return of almost 6%. Here we see the power of a proven dividend aristocrat which has managed to grow its average dividend per share by 16% over the past decade.
From a technical standpoint, it is worrying to see that the weekly moving averages have now crossed which means a down-move is underway. Furthermore next heavy support is not really until the $40 level. This level acted as heavy resistance between 2011 and 2013 until shares finally mustered up the momentum to break out of that trading range. Although the distributors more or less topped with the pharmaceutical industry in general in 2015, CAH for example has failed to print lower lows since that point, which is concerning. The IBB Biotechnology ETF managed to bottom in 2016 and has been making higher lows and higher highs ever since. The question is whether this divergence will continue.
Yesterday’s trading action (November 20th) brought the stock to new lows. As a swing trader, because of the downside potential, I would be looking for a weekly swing here before contemplating a trade to the long side. Nobody knows when this selling pressure will cease so patience is required at present. Alternatively one could see if both today’s and tomorrow’s trading take us further away from the intra-day low of $54.66 yesterday. If that were to be the case, there would be a good chance of Cardinal forming a weekly swing this week. Then one could place a long trade early with a tight stop to minimize risk. We will play this one by ear for the time being.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CAH over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Article source: https://seekingalpha.com/article/4126906-cardinal-health-wait-swing