Medco Health Solutions Inc. (NYSE: MHS, Stock Forum) has fallen ill in 2010, and the stock doesn’t look like it will embark on the road to recovery anytime soon. The year started out on a high note, with MHS soaring to an all-time high of $66.94 on Jan. 15., but the stock peaked early, and has been locked in a steady decline ever since. What's more, MHS' price action was dealt another blow on July 22, when investors reacted negatively to the company's second-quarter earnings report.
For the quarter, MHS edged past Wall Street's expectations by a penny per share, and narrowed its full-year outlook to a range of $3.34 to $3.39 per share, excluding items. Analysts had set their sights on full-year earnings of $3.37 per share.
Investors were not happy with the results, sending MHS shares more than 8% lower the following trading session. Since that decline, the stock has been pressed steadily lower by resistance at its declining 10-day moving average. MHS has even breached former support near $45 per share, an area that is home to the equity's 50-month moving average.
On the sentiment front, MHS still maintains a rather bullish contingent of analysts and investors, despite the stock's worsening technical outlook. For instance, 16 of the 17 analysts following the stock rate it a "buy" or better, with no "sell" ratings to be found. What's more, Thomson Reuters reports that the average 12-month price target for MHS rests at $66.52 per share - a premium of about 49% to the stock's close at $44.64 on Monday. Any downgrades or price-target cuts could exacerbate MHS' current decline.
Outside of the analyst community, options traders are also heavily bullish on MHS. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.81 indicates that calls outnumber puts among options with less than three months until expiration. This ratio also arrives just three percentage points shy of an annual low, meaning that these speculative investors have rarely been more bullishly aligned during the past year.
What's more, according to data from the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE), many of these calls may have been bought to open. The current 10-day ISE/CBOE call/put volume ratio stands at an impressive 8.47, meaning that more than eight calls have been bought to open for every one put purchased in the prior two weeks. This reading also ranks above 99% of all those taken in the past year, revealing that the bulls have rarely snatched up calls at a faster pace during the prior 52 weeks.
The bottom line is that MHS' poor price action, weak fundamentals, and heavily bullish sentiment backdrop do not bode well for the shares from a contrarian standpoint. With investors hoping for a rebound, and MHS extending its year-to-date losses to more than 30%, it could be only a matter of time before these bulls are forced to sell off their positions and capitulate to the stock's decline.
Disclosure: Joseph Hargett has no financial interest in any of the equities or products mentioned in this column