As we parse the market for stocks that are holding up well that still look attractive fundamentally, the pickings are increasingly slim. However, one of our prior favorites from earlier this year, Abbvie, has maintained a bullish fundamental and technical profile.
I took off a long call spread position in ABBV in late June for a gain with the following thoughts:
The inability of ABBV to get above $55 in the past week, even on the news of the Shire approach for tax purposes, is not a positive development technically. Moreover, our Aug 52.5/60 call spread position now only has 1.5 months until expiration, and will start to decay more quickly (we originally bought it in January with the thought that decay would not be a problem until the summer).
This trade has been a nice winner for us, and while we would have liked to have seen a breakout, we have to take what the market gives us. We’ll take the spread off for $2.55 for a decent gain of $2.20 on the original structure overall (we bought back the Aug 45 put in mid-May, included below).
Action: Sell to Close ABBV ($54.50) August 52.5/60 Call Spread at $2.55 for a $2.20 gain
Since then, ABBV has actually staged a breakout above the $55 level, which initially didn’t hold the selling in July, but has held so far on the most recent market weakness:
The $55 level is a key support spot for ABBV going forward. Our original interest in a long position in ABBV was actually based on a fundamental view that ABBV was a more diversified, better managed company with a cheaper valuation than peers. I laid out those thoughts in a new trade post last November:
In addition to the existing stable of drugs, the company has more than 20 compounds in Phase II or Phase III development. This is a well diversified pharmaceutical company at an interesting valuation.
ABBV is better than almost all its U.S. peers on simple valuation vs. growth comparisons, and slightly expensive to its European peers (as are most U.S. stocks).
Fast forward a year, and the broad thesis in favor of the bullish ABBV view still holds.
However, the ideal entry for me would be a move back to the $55 breakout level. At that juncture, I’ll be looking for a new long call spread position in ABBV that could benefit from a rally over the next 6 months, such as buying the May 57.50/ 67.50 call spread for around $2.25.
If I don’t get such an entry, so be it, but I’m going to keep my eye on ABBV for a possible position in the coming weeks.