Health Care’s Highest Yields

01/27/2012 11:10 am EST


Thomas Aspray

, Professional Trader & Analyst

Some of the biggest and highest-yielding drug stocks are declining near attractive buy levels, giving income-oriented investors a nice opportunity to buy.

The early strength in the stock market on Thursday was later hit with selling as stock index futures declined for most of the day. This is consistent with a loss of upside momentum, but there are no signs of a short-term top.

If you are waiting for the major market averages to reach a certain corrective level before you buy, you may miss out. Sector rotation is how the market has been correcting recently with the material stocks coming to the forefront early this week.

On the other hand, high-flying industry groups like homebuilders look ready to correct further, and I recommended taking some profits earlier this week (see “Don't Chase High-Flying Homebuilders”).

Some of the large, highest-yielding drug companies have also corrected and may correct further over the next few weeks. This should be an opportunity to add them to your portfolio, and the four health care stocks I am focusing on today all yield over 4% currently and would yield even more if purchased at lower levels.

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Chart Analysis: Merck & Co. Inc. (MRK) has had an impressive rally from the August lows of $29.88 and has next major resistance at the 2010 highs of $41.56. The stock currently yields 4.3%.

  • The daily chart has short-term support now at $37.80-$38.20 with much stronger support, line a, in the $36 area
  • Daily relative performance, or RS analysis, has declined from the late-December highs but is well above long-term support at line c
  • The volume surged in the middle of October, as the daily on-balance volume (OBV) broke through its downtrend from the May highs, line d
  • The daily OBV is well above support at line e and the weekly OBV (not shown) is also positive

The daily chart of Eli Lilly and Co. (LLY) shows a sharp drop in early January after the company’s guidance disappointed the market (generic competition is expected to hurt profits). LLY hit a high of $42.03 in December and is now down over 6% from the highs. It currently yields 4.9%.

  • The chart has support at the prior breakout level of $38.50 (line f) with stronger support at $37-$37.50. Major support stands at $36.50, line g
  • The RS line has broken its uptrend (line h) that goes back to the early-2011 lows while the weekly RS is still above key support
  • Daily OBV dropped below its weighted moving average (WMA) in early January and is testing its longer-term support
  • Weekly OBV (not shown) is positive but did not confirm the most recent highs

NEXT: How to Play Giants like Pfizer, Bristol-Myers Squibb


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Pfizer Inc. (PFE) is up 30% from the August low of $16.63. PFE traded at $49.32 in 2000, so it had been in its own bear market before finally bottoming in March 2009 at $11.62. The stock currently yields 4.1%.

  • There is next resistance at $23-$24 with the major 38.2% Fibonacci retracement resistance at $26.02
  • The RS analysis has been declining since the middle of December and is now testing support at line c. The weekly RS (not shown) is still well above its long-term support
  • Thursday’s very heavy volume of 135 million shares was over three times the average daily volume
  • Daily OBV has therefore dropped through its uptrend, line d, but the weekly OBV did confirm the recent highs
  • There is first good support now at $21-$21.20 with much stronger support in the $19.40-$20 area

Bristol-Myers Squibb Co. (BMY) has started off 2012 on a rough note, peaking at $35.44 on the first day of the year and declining 8.3% from those highs since. The stock currently yields 4.20%.

  • The daily uptrend, line e, is now being tested, with the 38.2% support form the August low of $35.69 at $31.70 and the 50% support at $30.54
  • The daily RS line did not confirm the most recent highs and is on the verge of breaking support at line f
  • The daily OBV dropped below its weighted moving average before the end of the year and has now broken three-month support at line g
  • It is still well above the long-term support at line h

What It Means: In terms of sectors, as I was expecting in early January, investors were likely to start favoring the less-defensive sectors.

However, I still think the high-yielding health companies have a place in one’s portfolio, especially if they are purchased at lower levels. Those with nice profits in Pfizer Inc. (PFE) should take some partial profits now.

How to Profit: For Eli Lilly and Co. (LLY), go 50% long at $37.94 and 50% long at $37.08 with a stop at $36.22 (risk of approx. 3.4%). (For more on LLY, see also “Big Drug Stock Set Up at Key Level.”)

For Bristol-Myers Squibb Co. (BMY), go 50% long at $31.86 and 50% long at $31.14 with a stop at $29.78 (risk of approx. 5.4%).

I have no new recommendation for Merck & Co. Inc. (MRK) at this time.

Portfolio Update

For Pfizer Inc. (PFE), as previously recommended, buyers should be long at $17.03. Sell half the position now and raise the stop on the remaining position to $19.24.

For Johnson & Johnson (JNJ), buyers should be long at $62.88. Raise the stop to $62.74 at this time.

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