A Cardinal Choice

06/13/2003 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

You can't find busier people in the investment business than Michael Murphy and Bernie Schaeffer . Both manage money, author books, and publish multiple financial advisory services for their followers. Murphy focuses on technology, from health and biotechnology to more traditional high-tech areas. Schaeffer is an expert in the options arena and operates Schaeffer's Investment Research, a one-stop shop for information on the options markets. Both advisors recommend Cardinal Health.

"Cardinal Health (CAH NYSE) reported record earnings and revenues for the third quarter and hit the consensus $0.86 earnings per share estimate," says Michael Murphy in his Health Investing newsletter. "Revenues, at $14.4 billion, were a bit lighter than expected, which management attributed to its pharmaceuticals trading operations. Because many drug companies were charged with channel stuffing last year--most notably Bristol-Myers Squibb, with which Cardinal does a lot of business--there has been a concerted effort to decrease inventories, leaving less product for Rx trading. Management reconfirmed guidance for the year, and shares recovered from some overreaction in the market. Meanwhile, Cardinal announced it will be the exclusive distributor for a new line of ventilators recently approved by the FDA. The FDA also approved a new line of single-use surgical drapes that should cut down on the incidence and spread of hospital-acquired infection. Subsidiary Medicine Shoppe International, the largest US chain of independent community pharmacies, has integrated online communication capabilities from ChainDrugStore.net into all of its 1,000+ nationwide pharmacies. The network improves information exchange on prescriptions. Buy CAH under $60."

"Cardinal Health makes our bullish list for options traders," says  Bernie Schaeffer, editor of The Option Advisor. "Recently, the equity staged a dramatic surge following news that politicians were closer to passing prescription drug coverage for the Medicare program. The immediate beneficiaries of such a move are expected to be pharmacy-benefit managers and drug wholesalers such as CAH. From a technical perspective, the rally on the heels of the potential positive development ushered the shares back up to levels last visited in November. Turning our attention to sentiment, pessimism remains skewed to the bearish camp. On the options front, speculators jumped on the put side in the wake of the equity's surge higher. Our research indicates that the equities Schaeffer's put/call open interest ratio (SOIR) rose to a level where there are 1.71 open put contracts for each open call contract in the front three months' of options data. In addition, the stock's short interest ratio is currently sitting at 4.67 days to cover, which could provide some fuel for a continuation of the recent move higher. Finally, prior to the release of the positive catalyst, Moody's Investor Service changed its rating outlook on CAH to negative from stable. Traders should target a move up to 69.46 with a stop-loss set for a close below 59.99."

 

 

 

 

 

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