Mixing the Kool-Aid: Mad Scientists at Abbott Labs Drink Their Last! (ABT)

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Nota Bene: Changes to our publication schedule.

Next Monday, September 26^th, on Rosh Hashana, there will be no letter.

A Jew and His Gold will publish as per usual next Thursday.

Publication of A Jew and His Money will resume the following Monday, October 3^rd.

And now for today’s business…

Today’s trade takes on the misanthropes at Abbott Labs (NYSE:ABT), makers of Similac, the living mother substitute.

ABT has been pulling the wool over people’s eyes since 1888, piling up the profits (and the cadavers) from their headquarters in Chicago, Illinois as they peddle their broad ‘healthcare’ product line.

But not all is well in the den of these wicked mad scientists, and certainly not on the stock front.

As you’ll see below, the stock is already down some 28% from its all-time high back in December of last year.

And now it sits on the threshold of another meaningful dump.

But before we get to the chart, and our most excellent means of cashing in on the coming decline, consider the company’s fundamentals –

• P/E is a relatively reasonable 21.61,
• Dividend Yield is 1.81% per annum, while…
• Price to Book is a black-eye, too high 5.00.
• Most importantly, however, analysts are expecting earnings to DECLINE in the coming year by a full 7.01%.
• In the last two months, no earnings revisions were positive, while six analysts readjusted their estimates lower.

And that doesn’t bode well.

At the same time, regulators are warning that the company’s MitraClip heart valve device has been malfunctioning – exactly as a new competitor enters the market.

In short, we got problems in the lab, Igor.

Now look at the chart –

Technically, she looks as follows –

1. Both RSI and MACD have been sub-waterline bearish since January (in green) – and there’s little sign of that changing soon.  Bears are in full control.
2. Moreover, all the salient moving averages are trending lower, and within days will be fully unfurled (in blue).  Once that occurs, ABT will be ‘locked’ into a bear market the end of which none can foresee.  Worse than that, an iron girder at 120 (and declining) will seal any possibility of a north-bound breakout.
3. Current price action is forming a descending triangle pattern with support at 101 (in red).  Should that level buckle, we foresee declines to the 93 mark (in purple), where a simple Fibonacci calculation provides next strong support.

And it’s for all the foregoing that we’re now recommending the following –

A Jew and His Money recommends you consider selling the ABT November 18^th 100/105 CALL spread* for a credit of $2.75 (7.15/4.40) and buying the ABT November 18^th 110/105 PUT spread** for $3.20 (8.25/5.05).  Total debit on the affair is $0.45.

[*Sell the 100 CALL and buy the 105 CALL.  **Buy the 110 PUT and sell the 105 PUT.]

Rationale: it’s a genuine bargain to find $4.55 in profits from an outlay of just $0.45.  That’s for starters.

Next, it’s nice when the full winnings of the PUT spread are already in hand.  That is, with price now at 104, we’ve bagged the long side of the trade before we even start.

All we need now is a decline below 100 to eliminate the debit (CALL) side of the bet – and we’ve won.

That amounts to a pullback of just 3.8%, and considering the technical set-up, it doesn’t appear such an onerous expectation.

Max loss is $5.45 (difference between the CALL strikes plus the initial debit).

Time is good, too.  Sixty days seems an ample duration to get the job done.

May you be inscribed in the Book Life

for a sweet, healthy and profitable year.

With kind regards,

Hugh L. O’Haynew

Follow @HughLOHaynew