Amgen (NASDAQ:AMGN) is in our model portfolio, and we want to review the fundamental and technical buy signals it had when we placed it in the portfolio. We track these signals on a daily basis, but just before earnings, we want to drill down to avoid any negative surprise if possible. Our signals before earnings are usually right, but there are always exceptions. There are negative and positive surprises that sometimes we can spot before earnings.
Our starting point is always to review what the sell side analysts are saying and what the portfolio managers are doing with AMGN. That is the framework of the picture we are looking to see. Then, we flesh out the portrait with the fundamental metrics and the technical signals to verify what is happening. Finally, we compare all of this with what our computer says every day about AMGN. All of that leads to our conclusion whether to hold or sell before earnings.
Sell Side Analysts
According to Yahoo, the number of analysts having Buy ratings on AMGN is dropping. In December, there were 14 Buys, and that dropped to 10 in January. Their consensus target for one year is $245. Other analysts’ targets are higher ranging from $250 to $280. The average estimate for revenues is $6.06 billion and earnings of $3.48, and in the last 90 days, that increased from $3.36. Whisper numbers are higher around $3.60.
According to Nasdaq, about 2,000 institutions own 460 million shares or 77%. Latest records show slightly more selling, about 26 million shares vs. 25 million purchased. Some of the institutions I like to watch were still buyers, but there was one that was a seller and concerned me. When the Index selling starts, as with the coronavirus pullback, I like to know that the institutions are still big buyers on balance. Unfortunately, that is not the case with AMGN, and you can see price is slow to recover from the recent market hit.
Finviz provides a quick glance at the fundamental metrics and some other interesting data like the short ratio. The short ratio is high, and if earnings are good, as I expect they will be, then the squeeze on the shorts may help price move back up to the old high.
AMGN has a nice dividend yield, and this pullback in price may attract the dividend players. A nice dividend provides a cushion when price drops. I look for total return to be above 10%, so I am always looking for more than just a good dividend. Our computer program is calculating a total return of almost 20% implied return, and that is one of the reasons it is in our model portfolio.
The forward PE of 14 on forecasted earnings of $16 next year looks problematic when the 5-year growth rate is only 7.9%. The PEG is coded red at 2.18, thus spotting this hurdle longer term. Earnings this year have grown 14.8%, so no problem. Next year is at 9.27%, and that has to improve or price will drop. Perhaps, that explains the number of analysts dropping their buy ratings. It may also explain the high short ratio. The price to free cash flow looks acceptable, as does the price to cash.
Here is our chart, with our most important, computer-generated, signal at the top. This is not a purely technical signal but includes an equal weighting for fundamentals. It shows our Buy signal dropping to a Hold signal.
At the bottom of the chart is a purely technical signal, and it identifies AMGN as underperforming the Index. Obviously, we do not want such stocks in our portfolio.
We will wait for earnings because the whisper number could be right and, if so, price may pop back up, squeezing the shorts. However, if AMGN continues to underperform the market, we see enough fundamental reasons to delete it from our 2020 model portfolio. If there is a negative surprise in earnings, our most important signal will drop from a Hold signal to a Sell signal shown at the top of the chart. We are not expecting a negative surprise this time around.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AMGN, OR A SHORT POSITION over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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