Company Description:
Forest Laboratories develops, manufactures, and sells ethical pharmaceutical products that are used for the treatment of a wide range of illnesses. Forest Laboratories' growing line of products includes: Lexapro(TM), indicated as initial as well as maintenance treatment of major depressive disorder; Celexa(TM), an antidepressant; Tiazac®, a once-daily diltiazem, indicated for the treatment of angina and hypertension; Benicar(TM)*, an angiotensin receptor blocker indicated for the treatment of hypertension; and Aerobid®, an inhaled steroid indicated for the treatment of asthma.
(source: company press release)
Why We Like It:
High-profile stock splits have been pretty rare over the past year. That's not too surprising. After all, a stock usually has to see a large amount of upside action before the company decides to announce a split. Large-cap stocks seeing strong, sustainable gains have been few and far between - But there are always a few exceptions to the overall trend. As exhibit A-1, we have Forest Labs. Strong sales of its psychotropic drugs Celexa and Lexapro have helped to send FRX sharply higher since September. Having seen great success as an antidepressant, Forest Labs has petitioned the FDA to market Lexapro as a treatment for generalized anxiety disorder. Shares really caught fire on October 1st after the company said it would beat analyst expectations by at least 30% in the second quarter. Over the next two months FRX ascended in a steep uptrend and eventually reached an all-time high of $109.98. Finally, negative news on December 6th spooked the bulls into taking profits. Shares gapped lower after the FDA said it wants additional studies before it allows Forest to market a hypertension drug called lercanidipine.
While this delay is a setback, there are other drugs in the pipeline that may help FRX pick up the slack. One of the most promising drugs is memantine. On Friday Forest Labs submitted an application with the FDA to use memantine for treatment of Alzheimer's Disease. The government agency has 60 days to decide if it will accept the application for the review. While that's way beyond our relatively short-term trading timeframe, speculation of an FDA approval may help to give FRX a bullish bias. More immediate buying pressure may result from the upcoming 2-for-1 stock split, which was announced on Monday. The split will be payable on January 8th to shareholders of record on December 23rd. Could a good old-fashioned split run take place ahead of the payable date? We think odds are very good if shares manage to begin filling in the early-December gap. The stock has formed a bullish wedge over the past two weeks, while the MACD is beginning to curl higher below the baseline. We suspect that a move into the gap, combined with a breakout above the rising 50-dma at $100.53, could send FRX towards the $108-$110 region. Point-and-figure chartists will also note that a trade at $100 will create a double-top buy signal. Our entry trigger for this play will be placed at $100.26. Conservative traders may want to wait for shares to actually move above the 50-dma. We think FRX will have enough upside momentum to break above this moving average once it slices through psychological resistance at $100. If the play is triggered our stop will be placed at $95.98. Those who are more risk-averse could use a stop slightly below $98.00.
Annotated chart - FRX:
