Buy Alert: United Therapeutics (UTHR)

By Jim Pearce • June 9, 2017

TRADE INSTRUCTIONS
Date: June 9, 2017
Name: United Therapeutics Corp.
Symbol: UTHR (NasdaqGS)
Type: Open
Limit: Buy below $136

TRADE TARGETS
Holding Period: 4 months
Target Return: 11.7%
Annualized Return: 35.1%
Target Price: $152
Stop Loss Level: $118

COMPANY DESCRIPTION
United Therapeutics Corporation develops and commercializes biotechnology products to address the unmet medical needs of patients worldwide with chronic and life-threatening diseases associated with pulmonary arterial hypertension (PAH). United Therapeutics Corporation was founded in 1996 and is headquartered in Silver Spring, Maryland. Link to company website.

TRADE RATIONALE
Biotech stocks are inherently volatile because they are difficult to evaluate, so it’s rare that our Rapid Profits Matrix identifies one as a trading opportunity based on the financial metrics it measures. But it likes what it sees in UTHR in terms of earnings yield and return on total capital, ranking it 17th out of the 5,000+ stocks in our database.

As recently as four months ago UTHR was trading above $160 but dropped below $130 in late February after releasing its fourth-quarter and year-end results for 2016. Both top-line revenue and bottom-line earnings grew modestly on a quarterly and YoY basis but fell short of the “whisper number” analyst were expecting.

As a result, six weeks ago the company announced it will repurchase $250 million of its shares over the remainder of this year. With a market cap of $5.8 billion, that amount represents roughly 4% of UTHR’s outstanding stock. That should provide a floor beneath its share price around $125, just a few dollars below its current value so downside risk is minimal.

As for upside potential, the same dynamic that has dampened earnings recently – an abnormally high percentage of patients remaining in “front line” PAH therapies – should work to its advantage later this year as many of those patients graduate to the more advanced therapies that drive profitability for UTHR (as discussed in its first-quarter earning press release).

We’ll know in another six weeks when the company releases its second quarter results if that is indeed the case. Until then, its share repurchase program and gradually improving sentiment towards the biotech sector should push its stock price up towards the $140 level.

Note: Since UTHR has a high share price, buying deep-in-the-money call options may be a less expensive way to participate in this trade.

Stock Talk

Comments Guidelines
Rick

Rick

Bought the Nov 135 Calls @ 10.50 on Fidelity

Tom Getz

Thomas Getz

Hi Rick,
I just joined SW, wonder if you can tell me how the call will work. I’ve sold Puts and Calls, but never bought them. If UTHR goes up over 145, will you then sell your call, or will you buy the stock and then sell it? (That would be an extra trade fee right?) Also, your total risk is the price of the call, right? So, if it never goes up, your call will be worthless?

Tom Getz
Rochester Hills, MI

Rick

Rick

Tom,

I usually sell the CALLS before expiration if the underlying stock hits Jim’s target or if I get a real quick run up based on an increase that has not yet reached Jim’s target.

I believe the exercise and sell would be more in fees.And yes, the total risk is the cost of the call and if it never goes up or goes down, the call could be worthless. It depends on whether I buy at a strike is in the money and so less risky or I buy at an out of the money strike and so more risky.

Tom Getz

Tom Getz

Thanks.

Louie

Louie Dugan

Trader Lou

Tom Getz

Tom Getz

OK, Jim,
I signed up for the Systematic Wealth program. But, I have to say I’m a bit nervous about it. I thought you said all I would need to commit was $10k minimum, and maybe up to $20k to be part of it. Then, after signing up and reading the welcome note, and the FAQs, I see you recommend $50k. Plus, your first recommendation that I can take advantage of is a $131 stock, which means over $13k for 100 shares of one position. Of course, you say we can use options, but this wasn’t supposed to be an option trading program, right? I’ve sold Puts and covered Calls, but that’s the extent of my experience. If I have to trade options, will you also tell me how to do that? Is it still a good idea if I buy 30 or 40 shares of a stock?
I’m willing to commit $20k, and I enjoy some “swing” trading, so I’m on board. But, I hope I won’t be run off the table with too many trades. I’m mostly a dividend seeker, holding stocks for the “long term”, whatever that may be.

Jim Pearce

Jim Pearce

Hi Tom, and welcome to Systematic Wealth! It appears some clarification is in order. Systematic Wealth is a trading service, so it does not make long-term buy & hold recommendations nor does it place any emphasis dividend income. On average we recommend 3 – 4 new purchases every month, each one with a target holding period ranging from 1 – 6 months. Using odd lots to execute our advice should have a negligible impact on the net return on our trades given how inexpensive online trading has become. We suggest a $50k account minimum to justify the subscription cost for this service (assuming equity trades only; options traders could justify a lower minimum given the leveraged returns of options). We do not provide specific options recommendations, but many of our subscribers share their options trading strategies so you may be able to get some guidance from that. Hopefully, you can find a way to make this service work for you but if not then let us know so we can find a better fit for your situation. Thank you.

Tom Getz

Tom Getz

Thanks, Jim. I’m aware that this is not a buy-and-hold. I usually commit about $15k to “playing the market”. That’s where this strategy should work. I might be a little shy of full commitments on some stocks – for example I bought 40 shares of UTHR today. But, that’s OK; I’ll hopefully still come out ahead, just maybe a little less money. And, if this “play” account builds, I can commit more money to it. I also assume that I should pass on your other June recommendation because it is over the recommended buy price. I’ll watch for the next recommendation. (I am a Personal Finance and Utilities Forecaster subscriber to help with my dividend and buy-and-hold stuff.)

Dramatic License

Dramatic License

This is a tricky one. The option pricing on this seems pretty high so it would eat up a lot of the gain, assuming it makes a big gain. Not sure what the best way to play this is. Suggestions? If I am going to go options I think Rick has it right with the Nov 135 calls.

Dramatic License

Dramatic License

Ended up just going deep in the money on the long calls (Jan 2018).

Fernando Rodriguez

Fernando Rodriguez

I did a Put Credit spread for July 21st (before earnings).
BTO $120 and STO $125 for a $1.10 credit per contract.
Potential return 28.2% if it stays above $125.
Will decide next step after earnings.

Jim Pearce

Jim Pearce

Fernando – I’m curious to hear how this trade worked out for you. Looks like a good decision to terminate it prior to yesterday’s earnings release (https://finance.yahoo.com/news/united-therapeutics-corporation-reports-second-100000402.html), which looked worse than it really was due to a large “Estimated loss contingency” that was charged in the second quarter.

Fernando Rodriguez

Fernando Rodriguez

Jim,
The Put Credit spread worked well for me as the profit was $1.10 credit per contract. The stock ended above $125 at expiration.
Thanks,
Fernando

Jim Pearce

Jim Pearce

UTHR up nearly 10% in early trading after Barron’s reported it may become an acquisition target: “United Therapeutics (UTHR) has jumped 9.1% to $138.46 on reports Gilead Sciences (GILD) and GlaxoSmithKline (GSK) could be interested in buying the company. Gilead Sciences and GlaxoSmithKline is little changed.”

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