Jon Lewis

Cephalon Doesn't Have the Right Medicine

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Cephalon (CEPH) is a drug manufacturer that is dwarfed by such competitors as Johnson & Johnson (JNJ) and GlaxoSmithKline (GSK).

Being smaller (if you want to call a $4 billion market cap "small") is not necessarily a bad thing, of course. But CEPH has some high expectations to fill, which could make it vulnerable to a so-so earnings report. The company is scheduled to report on Aug. 4.

CEPH usually beats the consensus earnings forecast, but that's not always a good thing for the stock.

The company beat estimates the past two quarters, but the stock sank nearly 6% and 14% in the two weeks following those reports.

On the charts, the stock has enjoyed a nice 11% run-up during the past week. This jump pulled the shares above their 20-day and 50-day moving averages. But now the 100-day looms overhead. The last time the stock saw the top side of this trendline was in February.

In addition, the $60 level could be problematic. This is the site of the bottom of the stock's downward gap in May and the March lows. The shares are also flirting with being overbought, which means it could be time to take a breather.

Sentiment toward CEPH is definitely tilted toward the optimistic side of the ledger, especially among analysts.

The Street clearly loves the stock, as 14 of 19 brokerages rate the shares a "strong buy," with the remaining five being "holds." That doesn't leave much room for upgrades.

Options traders are showing their preference for the shares, as the put/call ratio has been declining throughout July. And short interest is sitting among its lowest readings of the past two years.

CEPH could always issue a blowout earnings and outlook report. When that happens, any stock will go up, no matter what the technical and sentiment backdrop might be. But the odds of such a report from CEPH are slim. And that's what the stock appears to need to keep its brief rally intact. So consider buying puts on CEPH ahead of earnings.

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