Pumping up the volume
04/24/18
With health care stocks starting off this week with relative strength (second-strongest sector in the S&P 500), it was interesting to see Edwards Lifesciences (EW) trading a healthy number of call options yesterday—more than five times its normal volume less than halfway through the trading day:
LiveAction scan (EW) 8/7/15 – 4/23/18. High call options volume

Source: OptionsHouse

Interesting but maybe not surprising, since EW releases earnings today. The company specializes in heart-related medical technologies—one of their innovations enables heart-valve replacements via catheter instead of open-heart surgery1—and has been the recipient of several upward earnings revisions recently, which is seen by some as an indicator of a potential earnings beat.2 Edwards has, in fact, beat earnings in 18 of its past 19 quarterly releases.3

Now, what an earnings beat may portend in terms of price action is another story. The daily chart below shows EW’s two most recent earnings releases, from February 1 and October 24. In October the company beat on earnings but missed on revenue, while in February it topped both estimates. In the first instance the stock gapped sharply lower but took off to the upside after bottoming a few days later. In the second case, the stock first gapped higher, then pulled back (this was during the market correction, remember), then pushed to new highs.

Edwards Lifesciences (EW) 8/7/17 – 4/23/18. Recent earnings.

Source: OptionsHouse

After hitting a record high above $143 in mid-March, EW shares settled into a roughly $10 trading range, with yesterday’s action pretty close to the middle of that range. Given the volatility surrounding its recent earnings releases, there appears to be a good chance that one of those boundaries—maybe both—is going to be punctured sooner rather than later.

Longer-term, the Street seems to have a bullish take on the company. The average analyst estimate on the E*TRADE website yesterday was $155.10 (within a range of $120-$180), which is almost $20 above yesterday’s price levels:

EW analyst targets. $155 average target

Source: TipRanks

Earnings are schedule for after today’s close, so get ready because the stock’s pulse may start to quicken.

Market Mover Update: Alcoa (AA), which rocketed in recent weeks amid US sanctions on Russian aluminum giant United Co. Rusal, tumbled more than 13% yesterday when reports surfaced that the White House was reconsidering its penalties.

Yield Watch. 10-year T-note futures (TY) dropped to a new contract low yesterday as 10-year yields continued to push closer to 3%. The June 10-year T-note contract (TYM8) fell to 119.20, the lowest the market has traded in almost seven years. Some investors worry a sustained move by yields above 3% will put pressure on equities.

 

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1 Investor’s Business Daily. Aortic Stenosis, And The Race To Catch Edwards Lifesciences' Heart Valves. 4/19/18.

2 Zacks.com. Why Earnings Season Could Be Great for Edwards Lifesciences (EW). 4/23/18.

3 StreetInsider. Edwards Lifesciences Corp. (EW) Earnings. 4/23/18.