[Tuesday] night, Amgen, Inc. (NASDAQ:AMGN) reported earnings and investors hated it. The stock fell 4% in after-hours trading. [On Thursday] the selling [was] still in full swing and there [was] no evidence of an imminent bounce. They didn’t disappoint on the report, but perception is what counts for the short term.
No, I am not here to share a bearish trade. I like to be somewhat contrarian, especially where there is tangible value. But I am not expecting an immediate rally either.
I am conservative in nature, so I like to build contingency plans, and that’s why I like to use Amgen options.
Coming into this earnings report, Amgen stock was up 21% year-to-date, which is in line with the iShares Nasdaq Biotechnology Index (ETF) (NASDAQ:IBB).
So it’s not a disaster if it dips a handful here.
The trend on the daily chart is still ascending and this dip merely brings it closer to the lower end of the channel.
None of the charts show a clear bullish entry point but that doesn’t sway me today.
Fundamentally, AMGN is cheap relative to the sector.
Its price-to-earnings ratio is at least 30% cheaper than Johnson & Johnson (NYSE:JNJ), Pfizer Inc. (NYSE:PFE), Merck & Co., Inc. (NYSE:MRK) or Celgene Corporation (NASDAQ:CELG). Its price-to-book is under five. Value is evident.
So it is clear that investors did not give Amgen a premium. However, nothing in the report clearly shows that investors are likely to take away the par … meaning that I see no reason that investors intend to penalize Amgen stock price to below its current fair value. And therein lies my opportunity.
I want to generate income out of thin air by betting that recent support levels in Amgen will hold for the next few months. Given that I am willing to own the shares at a discount from current levels, I am comfortable selling downside risk against those levels. If they hold, then I win.
Expectations do matter to the price action irregardless of valuation. After this dip, AMGN stock is trading about 10% below the average price target. Furthermore, most Wall Street analysts are in holding pattern on the stock.
With the stock trading closer to the lower end of the range, the odds of a downgrade headline are low. If the selling abates and prices stabilize, then perhaps some experts would reiterate their bullish conviction and invite buyers.
This is different than me advocating risking all $175 per share to buy the stock at face value and then expect the rally to profit. I don’t like to buy and hope. With my setup, I can still profit to my maximum potential even if Amgen stock falls further.
AMGN Stock Trade Idea
The Trade: Sell AMGN Feb 2018 $140 puts and collect $1.50. Here I have an 85% theoretical chance of success, but if prices fall below $138.50, then I accrue losses.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the AMGN $140/$135 credit put spread where, if successful, the spread delivers 10% in yield. Neither setup requires a rally to profit. This is a trade thesis that has a moat around it in case the selling continues for a few more days.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
— Nicolas Chahine
Note from DTA: How safe is Amgen’s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 90. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, Amgen’s dividend appears very safe, and a cut is extremely unlikely. Learn more about Dividend Safety Scores here.
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Source: Investor Place