Chris Johnson and Jon Lewis

Omnicare Bulls: What Are You People Smoking?

by Chris Johnson and Jon Lewis   10/28/09

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Last week, we discussed drug manufacturer Cephalon (CEPH). This week, we're staying in the same general industry (healthcare) and sticking with a bearish view. The stock is Omnicare (OCR), a pharmaceutical and pharmacy services company based in Covington, Ky., just across the river from where we live in Cincinnati.

You don't tend to hear much in the news about OCR. Maybe that's a good thing, and maybe not. What does speak volumes is OCR's chart, and not in a good way. 

The stock is down more than 20% so far this year, and currently sits below all its key daily, weekly and monthly moving averages. The shares are down more than a percent today, which has dragged the stock below its 20-day moving average after being rebuffed by its 50-day earlier this week.

You'd think a health-services company would be a good bet in a recessionary environment. That's apparently what Wall Street analysts have been thinking for some time. Perhaps it's just us, but can anyone explain why all 11 covering analysts rate OCR a "buy"? And why nine of those give the stock the highest "strong buy" rating? 

The shares have severely underperformed the market. At what point are these "experts" going to start jumping off this leaking ship?

Alas, though, it's not just analysts who are in love with OCR -- options traders are falling in line as well. The put/call ratio is in the bottom fifth of all readings of the past year, and calls greatly outnumber puts at the $22.50 strike, which could create added resistance at that level.

Are they looking at the same chart we are?

OCR has met or beaten the consensus earnings estimate for the past seven quarters. But the stock has not responded well following most of those reports. That tells us that expectations may have been too rich. Looking at the current analyst and option sentiment, it's easy to see why.

OCR is in a tough spot. A high-expectation environment and weak chart puts a lot of pressure on the company to deliver blowout earnings when it reports Nov. 5. That hasn't happened in a while, so there's no reason to think it will happen next week, especially with the cautious outlooks we've been seeing of late.

OCR is vulnerable, so seriously consider a put play.

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