Is Merck a Hot Stock?

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With shares of Merck (NYSE:MRK) trading around $56, is MRK an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Merck is a global healthcare company that delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The company consists of four operating segments: the Pharmaceutical, Animal Health, Consumer Care, and Alliances segments, and one reportable segment in the Pharmaceutical segment. Merck aims to provide valuable healthcare products and services to consumers, animals, and companies in need worldwide. Look for the company to see rising profits as it advances the products and services of the healthcare field.

Merck received FDA approval for the first of three allergy medicines in its line-up on Monday; the drug, called Grastek, targets grass pollen allergies specifically, according to a Merck press release and a recent Reuters report. Merck developed the immunotherapy drug in partnership with Denmark’s ALK Abello, and expects to launch the drug, which has been approved for patients ages 5 to 65, in the United States by the end of April. Immunotherapy drugs are a type of medicine which work by boosting the body’s immune system. In the case of Merck’s allergy medicine, the body actually becomes less sensitive to allergens; the drug actually contains some timothy grass extract and dissolves when placed under the tongue, according to Reuters.

“This important milestone marks another opportunity for Merck to build on our respiratory heritage with allergy specialists,” said Dr. Sean Curtis, vice president of respiratory and immunology at Merck Research Laboratories, in a press release Monday. Merck notes in its press release that many patients affected by grass pollen allergies decline allergy shots, despite being candidates for immunotherapy.

“With the FDA approval of Grastek, allergy specialists now have a new sublingual [under the tongue] approach to offer those patients for their grass allergies,” said Dr. David Bernstein, a professor of medicine and environmental health at the University of Cincinnati College of Medicine, in the press release. Merck says it estimates that the potential U.S. market for its new allergy medicines is around 3 million patients, and will eventually be worth as much s $1 billion in annual sales, according to Reuters.

T = Technicals on the Stock Chart are Strong

Merck stock has been surging higher in the last couple of quarters. The stock is currently trading near highs for the year and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Merck is trading above its rising key averages which signal neutral to bullish price action in the near-term.

MRK

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Merck options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Merck Options

27.11%

90%

88%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

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