Trending Pharmaceutical Distribution Stocks Provide Pullback Trade

Shockwaves traveled through pharmaceutical distribution companies in the fall of 2017 after reports surfaced that e-commerce industry disruptor Amazon.com, Inc. (AMZN) had obtained wholesale pharmacy licenses in 12 states. Those fears somewhat subsided when the internet giant decided to abandon its plans, citing barrier to entry complexities such as selling in bulk to large hospitals and building a logistics network to handle pharma delivery.

"You can't commingle opioids or narcotics with other general merchandise goods. You need cold storage through the entire chain. Plus, you need to connect all the suppliers with all the customers. The customers aren't necessarily Amazon's consumers, but the customers are places where pharmacy actually happens," billionaire hedge fund manager Larry Robbins told CNBC.

Although it appears less likely that Amazon will disrupt the pharmaceutical distribution industry any time soon, traders should keep up to date with further updates on President Trump's drug pricing plan that could trigger fundamental changes to wholesalers' business models and compensation structure.

Pharmaceutical distribution stocks have performed well in early 2019 due to strong quarterly earnings and should continue to benefit from an aging population and in particular specialty drugs, which according to the Drugs Channel Institute will account for 47% of the pharmacy industry's revenues by 2022.

Those who swing trade stocks showing clear upward momentum should add these three leading pharmaceutical distribution names to their watchlist. Let's look at several ways to play these strongly trending issues.

McKesson Corporation (MCK)

San Francisco-based McKesson Corporation (MCK) distributes pharmaceuticals and medical equipment in the United States as well as globally. It operates through three business segments: U.S. Pharmaceutical and Specialty Solutions, European Pharmaceutical Solutions, and Medical-Surgical Solutions. The drug distributor reported a 6% year-over-year (YoY) increase in 2019 fiscal third quarter revenue in its U.S. pharmaceuticals business and narrowed its 2019 adjusted earnings per share (EPS) guidance from between $13.20 and $13.80 to between $13.45 and $13.65. McKesson stock, with a market capitalization of $25.22 billion and offering a 1.19% dividend yield, is up an impressive 19.03% year to date (YTD), outperforming the medical distribution industry average by 4.49% over the same period as of Feb. 25, 2019.

McKesson shares spent the first seven weeks of 2019 trending strongly higher but retraced last week toward the 200-day simple moving average (SMA) and an uptrend line extending back to late December. The stock now trades near support at the $131 level that provides an entry point for swing traders who favor momentum plays. Look for a move up to $150, where the price may find resistance from a horizontal line that connects several swing points. Consider placing a stop-loss order just below the 200-day SMA to protect trading capital.

Cardinal Health, Inc. (CAH)

Cardinal Health, Inc. (CAH), with a market cap of $16.36 billion, is a global distributor of pharmaceuticals and medical supplies to pharmacies and hospitals. It also provides solutions that enhance its customers' supply chain efficiency. The company's 2019 fiscal second quarter revenue generated from pharmaceuticals jumped 8% YoY due to increased sales growth from pharmaceutical distribution and specialty solutions customers. Cardinal Health has raised its 2019 adjusted EPS guidance range from between $4.90 and $5.15 to between $4.97 and $5.17. Trading at $54.90 and paying a healthy 3.47% dividend, the stock is up 23.09% on the year as of Feb. 25, 2019.

Cardinal Health shares gapped above the 200-day SMA on above-average volume after the company reported its quarterly earnings on Feb. 7. The stock has recently pulled back to the $54 level, where price finds support from the upper trendline of a previous trading range. Traders who go long here could use a 15-day SMA as a trailing stop to ride momentum to the upside. Consider moving the stop to the breakeven point at the $58 level, where the price may encounter resistance from the April swing low and November swing high.

AmerisourceBergen Corporation (ABC)

AmerisourceBergen Corporation (ABC), founded in 1995 and paying a 1.87% dividend, is a major pharmaceutical distributor that engages in procurement, inventory management, reimbursement consulting, sales forecasts and logistics services. The company's pharmaceutical segment reported 2019 fiscal first quarter revenue of $43.74 billion, up 12.3% from the same quarter a year ago. AmerisourceBergen stock, with a market cap of $18.08 billion, has returned 15.69% YTD as of Feb. 25, 2019. Analysts have a 12-month price target on the drug distributor's stock at $92.31, nearly 8% above Friday's $85.67 closing price.

The AmerisourceBergen share price traded in a choppy sideways market between April and November last year before falling over 16% during December's broad-based correction. Buyers have since jumped back into the stock, which shows a V-shaped recovery on the chart. The recent dip back to a confluence of support from the 200-day SMA and a trendline dating back to late December offers a buying opportunity at the $85 level. Traders should book profits on a run to $94, where the price may consolidate as it approaches the top of last year's trading range. Close open trades if the stock drops beneath the Feb. 7 low at $82.90, as that would invalidate the momentum-play setup.