Rules of the Game: Ponder Perrigo

 | Feb 14, 2013 | 12:30 PM EST  | Comments
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Last week I wrote about S&P energy sector names whose earnings performances merited a glance. While energy remains the top-gaining S&P large-cap sector in this still-very-young year, health care is the runner-up, advancing 8.11% since Jan. 2.

For years, the medical sector has been home to dividend-yielding giants such as Pfizer (PFE) and Bristol-Myers Squibb (BMY), as well as growth leaders such as Alexion Pharmaceuticals (ALXN) and Intuitive Surgical (ISRG). In other words, if you're looking for large-cap names to round out a portfolio of individual stocks, you have plenty to analyze and choose from. I always begin by scanning for earnings and revenue growth on the fundamental side, augmented on the technical side by support above the 200-day moving average.

Generic drugmaker Perrigo (PRGO) shows new signs of life after several months of struggle. It was already trending lower when it gapped down on Nov. 7, following a first-quarter revenue miss. That's exactly the kind of intraday action that panics those with a trading mentality, rather than a longer-term investing mindset. I know, because I've been there and done that. I understand the thought process: Sell a stock like Perrigo when it gaps down or slashes key moving averages in heavy volume. It seems reasonable. You're keeping your capital and putting it to work in a trade that's going up.

That assumes, of course, that everything happens exactly the way the trader believes it will. The stock that gaps down will stay down, he will find a winner to put his money into, and sudden market swings (in either direction) will foul up the process. We know things don't work out perfectly like that. It took me many years to realize the futility of attempting such precise market timing.

So what does that mean for Perrigo? If you're not in the stock, this could be one to consider as a possible purchase. Of course, you have to take into account your other sector and market-cap exposure and your overall risk tolerance for individual stocks. If you own an individual stock, have a good reason for it -- not just because somebody mentioned it on TV or in an article like this one. The stock is up 11.2% so far in February, following better-than-expected second-quarter results earlier this month. This week, the company said it would acquire Rosemont Pharmaceuticals for about $283 million in cash. The U.K.-based company makes liquid medications.

The technical picture for Perrigo is fine right now, with the stock getting support above its 200-day average -- "Fine" as in not showing explosive price growth, but also not melting down.

On the fundamental side, earnings and revenue growth have been decelerating, but that does not necessarily signal the end of price appreciation, though it may mean slower growth. Additional acquisitions could help those numbers turn around in the next couple of years.

This year, analysts see the company earning $5.59 per share, up 12% over 2012. That's seen growing another 15% next year, to $6.42 per share.

I'm focusing on this stock today not because I'm head over heels about it. I am certainly not recommending a purchase, but it has some decent qualities, and is a good illustration of what to look for -- and of why it's not a great idea to abandon a stock just because it's trading below prior highs.

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