(By Rich Bieglmeier) Celgene (CELG) is the beneficiary of not one, but two upgrades today. RBC Capital moved its recommendation from "sector perform" to "outperform" while upping their price target from $90 to $100.
Piper Jaffray also thinks the biotech is a triple digit stock, putting a potential price tag of $110 on shares on their fresh "overweight" rating, hiked from "neutral." The pair of recommendation changes implies as-we-type upside of 9.9% and 20.1%, respectively.
While the two firms might eventually be correct, CELG's charts show a stock that's overbought and due for a correction. Shares are currently six standard deviations of 20-day volatility above the 20-day moving average, hardly a position a stock can withstand for an extended period of time. Celgene is as stretched out as far as we have ever seen from this perspective. Additionally, CELG's relative strength reading is at a 12 month high at 81.65, another reading that usually won't last long.
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A return trip to $84 would put the stock back into a more normal trading range.
Shares are sharply higher today and to start the week, as well. The company told a J.P. Morgan Healthcare Conference on Monday that the plan is to double sales to $12 billion by 2017 thanks to efforts to find new therapies and expand uses for older drugs. CELG has gained 11.53% in the first two trading days of the week.
Relative to its peer group, Celgene is fairly priced according to two of iStock's favorite metrics. Based on price-to-sales (P/S) CELG is a little underpriced at 6.79 P/S compared to the industry's 8.29. Meanwhile, the biotech trailing twelve month P/E of 25.20 is marked versus the group's 21.51.
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Although we suspect shares are getting a little ahead of themselves and vulnerable to profit taking, relative to its P/E and P/S history, CELG has headroom to move higher to meet its five year averages.
As we mentioned already, the market has priced shares at 25.20 times trailing twelve month earnings per share which is 20% lower than the fiver year average of 31.71. We see a similar markdown on a P/S basis as the five-years average stands at 8.9 matched against today's 6.79. Getting back to the five year averages would put CELG closer to Piper Jaffray's estimate than RBC.
Overall, Celgene (CELG) would have to grow sales by roughly 18% a year during the next four years to hit their goal of doubling revenue, which is actually less than Wall Street 3-5 year growth estimate 22%. CELG is attractive for long-term investors; however, patience might payoff in the short-term as the stock price is stretched to its upper limits in our view.