Bulls should be watching MDT closely
Coronavirus, or COVID-19, continues to be the talk of the Street. We've had a few brief respites from the outbreak concerns, but for the most part the "major" market moves have revolved around the latest headlines around the virus. The fears really heated up when tech bellwether Apple (AAPL) said its revenue for the quarter could be softer than expected, and this in turn has put pressure on the broader technology sector, and tech stocks as a whole have continued to top the list of daily winners and losers, as bulls and bears battle daily over the exact severity of coronavirus's effect on the global economy.
Interestingly, up until recently there seemingly had been little market chatter about the virus's impact on the healthcare sector itself. Indeed, most of the coronavirus-related updates have come out of tech companies and large multi-national blue chips like Coca-Cola (KO). More recently, however, one group of stocks has popped up on analysts' "radars" as one that could see additional volatility from the outbreak. While I could discuss the broader healthcare space in general, the one sub group that has drawn coronavirus-focused analyst notes has been medical device stocks, a group that's been a long-term favorite for bulls.
Take for example Medtronic PLC (NYSE:MDT), a company that's actively growing its heart device offerings and has a stock that is up more than 21% in the past 12 months. The shares were trading in record-high territory around $122 as recently as late January, but following an earnings release on Feb. 18 that included a warning about the potential impact of the coronavirus on the Chinese economy, a crucial growth area for the company (like so many others), the equity has pulled back to around the $113 area, pushing it below the 50-day moving average.
A quick consolidation appeared to be occurring near the 80-day moving average, which was sturdy support for the equity back in October and November, but MDT stock on Friday notched a notable close below this trendline. This weak price action comes despite the fact that J.P. Morgan Securities came in after the earnings release to "talk up" the company's potential in blood pressure devices. In fact, most of Wall Street seems to be staying behind Medtronic despite the coronavirus update and subsequent stock pullback.
By the numbers, 16 of the 21 covering brokerage firms recommend buying MDT still, and the average 12-month price target remains in all-time-high territory, standing at $126.48. A number of firms released post-earnings notes using Medtronic's "strong pipeline" as justification for their bullishness in the face of the coronavirus uncertainty. Options traders, too, have shown little fear around the security, as MDT has seen almost 34,000 long calls cross compared to 3,427 long puts over the past 10 days on the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). Peak open interest on the device giant resides at the out-of-the-money April 130 call, followed by the 125 call from the same series, with open interest at these positions dwarfing the next closest options.
These bulls will be watching closely now with MDT teetering right near its year-to-date breakeven point, along with a 50% Fibonacci retracement of its October-to-January rally. Plus, Medtronic's market cap is holding just above the $150 billion mark. If the stock does breach some of these crucial chart levels, traders may want to take note of the 200-day moving average, which is currently just below current levels, down in the $106-$107 area. A round of positive news around the coronavirus itself, however, could make MDT a candidate for a quick rebound, especially if the company was overstating the significance of the outbreak on its bottom line in an attempt to “under promise and over deliver.”
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 23.