At Schaeffer’s Investment Research, we employ a three-tiered analysis approach
known as Expectational Analysis® (EA) that was created more than two decades
ago. EA utilizes traditional methods of fundamental and technical analysis and
combines these with a third, crucial look at investor sentiment. It is this
third layer of analysis that provides a critical edge in selecting stock and
option plays. Both anecdotal and quantifiable measures of investor sentiment
provide a window into how the investing crowd perceives reality. These
perceptions serve as powerful contrarian indicators, as the crowd tends to move
as a herd and is, to paraphrase the venerable contrarian Humphrey Neill, “right
during the trend but wrong at both ends.” A look into the psyche of the
collective investing masses, while also taking into account important technical
and fundamental variables, can offer a reliable recipe for trading success.
The EA methodology has turned up a profitable trading opportunity in Axcan
Pharma (NASDAQ: AXCA). The company sells drugs mainly to treat
gastrointestinal ailments. URSO 250 is used to dissolve gallstones and treat
liver diseases. The firm also owns the global rights to PHOTOFRIN, with
applications for esophageal, gastric, and lung cancers.
On February 8, the company reported first-quarter earnings of 34 cents per
share, 12 cents better than the consensus estimate of 22 cents. Sales rose 11.6
percent on a year-over-year basis to $79.8 million versus the $72.6 million
consensus. Axcan Pharma also raised its prior revenue guidance for its 2007
fiscal year. It upped its expected 2007 sales range to $307-312 million. That’s
higher than the current Street estimate of $298 million.
Technically, Axcan Pharma has started the year off well. The stock is up 13
percent since the start of 2007, rallying along the support of its 10-day and
20-day moving averages. Additionally, the equity has outperformed the S&P 500
Index since the beginning of 2007. This is no small feat, as the SPX has been on
a tear recently, setting a string of new multi-year highs. Lending strength to
AXCA during this time of growth is the reaction of traders to the company’s
earnings report, allowing the shares to overcome prior resistance at the 15.25
area.
Moreover, the stock is challenging resistance at 16.25, the site of a
downtrending channel connecting its 2004, 2005, and 2006 highs. If AXCA’s
momentum can carry the shares above this region, we could see more buyers step
in and help usher the security even higher.
Despite the stock’s display of technical strength, we continue to see signs of
pessimism from investors. Short interest has begun to decline in recent months,
but still resides at significant levels. The 1.79 million shares shorted is near
an annual high, and at the stock’s average daily trading volume, it would take
more than 14 days to buy back these shorted shares. With a short-covering trend
already in place, AXCA is primed to continue its trek higher on the added buying
pressure.
Analyst coverage on the equity is lukewarm as well. According to Zacks,
six of the nine analysts offering up an opinion on the security rate the shares
a “hold.” Should these naysayers finally take notice of AXCA’s technical and
fundamental strength, a few upgrades could add fuel to the fire for the
security’s rally.
The culmination of this strong technical and fundamental performance amid a
wealth of negative investor sentiment results in a Schaeffer’s Equity
Scorecard rating of 7.0 out of a possible 10. This elevated rating indicates
that the security could continue to outperform the broad market during the
intermediate term.
