It’s been almost two years since we shared our bullish stance on Bristol Myers stock. Shares in the pharmaceutical major were changing hands for less than $46 in April, 2019. The company had just announced its planned acquisition of Celgene for about $74 billion and Wall Street apparently didn’t like the risks involved.
However, the decline from the top at $77.12 a share in July, 2016, looked like a textbook Elliott Wave correction. Since the theory states that once a correction is over, the preceding trend resumes, we thought BMY was actually attractive below $50. Not to mention the fact that based on discounted future cash flows, the company was also undervalued.
In January, 2020, the price exceeded $68 a share. Then, the coronavirus crash gave investors another chance to join the bulls in the mid-$40s. Last week, Bristol Myers closed at $64.56, after reaching $67.13 on Tuesday. Can the rally continue this time around?
Fundamental valuation metrics suggest that even after a 45% surge, Bristol Myers is still undervalued. Management expects the company to average $15B a year in free cash flow going forward. Dividing its current market cap of $145B by $15B gives us a P/FCF lower than 10.
Approach Bristol Myers Stock With Caution Above $60
Unfortunately for the bulls, cheap stocks often get cheaper. The market is driven by emotions and cannot always be relied on to rationally value a business. The chart above, for instance, is giving us a good reason to be careful with Bristol-Myers near $65.
It shows the recovery from the March 2020 bottom at $45.76 to $67.13. It can easily be seen as a simple a-b-c zigzag, where wave ‘c’ is an ending diagonal. This is a corrective pattern, which means a notable bearish reversal can be expected. The next chart explains where does this structure fit into the bigger picture.
It turns out the decline from $77.12 in July, 2016, might still be in progress. For the past four years the stock price has been moving up and down in a narrowing range. “Triangle” is the first word that comes into mind when an Elliott Wave analyst sees something like that.
The weakness from $77.12 looks like an incomplete (W)-(X)-(Y) double zigzag, where wave (X) is a textbook triangle correction labeled A-B-C-D-E. If this count is correct, we can anticipate a ~40% plunge to sub-$40 a share in wave (Y). Once there, the post-2016 bear market should end and the risk/reward ratio would switch in favor of the bulls again.
Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!
Disclosure: The author plans to add to his long position in Bristol Myers stock if this analysis proves correct.