This Pullback Could Be a Buying Opportunity
A combination of investments in its products line could make a company a winning long term investment. That could be the case with a large drug company as Forbes recently reported,
“Abbott Laboratories (NYSE: ABT) is investing to drive future growth. The company has launched a range of products over the past 18 months that have become meaningful contributors to revenue.
It is also supporting these products through increased marketing spending and acquiring new growth platforms. Within Diabetes Care, the Freestyle Libre continues perform well following its launch in October 2017.
Freestyle Libre is a wearable, sensor-based continuous blood glucose monitoring system. An advance over other self-monitoring products that does not require finger sticks, the Libre has received CE Mark certification for its next-generation system, which will allow it to be marketed in the EU.
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The Libre helped drive revenue in the Diabetes Care segment to $530 million in 4Q18, an increase of 32%. Abbott has expanded production of the Libre in order to meet demand from patients with Type 2 as well as Type 1 diabetes.
Within electrophysiology, sales have been driven by strong demand for cardiac mapping and ablation catheters. Within the structural heart business, sales drivers include the Amplatzer PFO Occluder and the MitraClip, which is used to repair leaky heart valves.
Two recently approved products are also likely to drive growth in 2019: the HeartMate 3 left ventricular assist device, which was approved by the FDA in October 2018; and the TactiCath Contact Force Ablation Catheter, which was approved in January.
Abbott reported 4Q18 results on January 23. Adjusted EPS of $0.81 rose 9.5% from the prior year and matched the consensus estimate. Net sales for the quarter rose to $7.8 billion, up 2.3% as reported and 6.4% on an organic basis.
Abbott has established new guidance for 2019. It expects organic sales growth of 6.5%-7.5%, which excludes the impact of foreign exchange. It also expects adjusted EPS of $3.15-$3.25. Based on the updated guidance, some analysts are maintaining an 2019 adjusted EPS estimate of $3.22.
Through increased marketing spending, Abbott is supporting new growth drivers such as the FreeStyle Libre and the Alinity diagnostic system. It is also building new growth platforms by integrating the acquisitions of St. Jude Medical and Alere.”
The long term charts shows that investors appear to agree with the analysis.
The short-term chart highlights the recent pull back could be a buying opportunity.
A Trade for Short Term Bulls
As with the ownership of any stock, buying ABT could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for ABT
Every day, we scan the markets looking for trades that ABT low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.
When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.
For ABT, the May 17 options allow a trader to gain exposure to the stock.
A May 17 $80 call option can be bought for about $1.90 and the May 17 $82.50 call could be sold for about $0.90. This trade would cost $1.00 to open, or $100 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $100.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in ABT the maximum gain is $1.50 ($82.50 – $80 = $2.50; $2.50 – $1.00 = $1.50). This represents $150 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $100 to open this trade.
That is a potential gain of about 50% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.