Merck shares fell more than 2 percent Monday, and was the worst-performing stock in the Dow, after the pharmaceutical giant reported mixed third-quarter earnings results.
While the drug giant beat earnings expectations, revenue fell short, and the drugmaker tightened its full-year forecast due to rising competition from generics.
Still, the stock has been among the better performers in the Dow year-to-date, rising 13 percent. And with the company sporting dividend yield of over 3 percent, almost 100 basis points more than the 10-year Treasury, some traders are wondering if the recent pullback could be a buying opportunity.
"[Merck] is in the process of turning around. It's making good progress, but isn't there yet," said S&P Capital IQ's Erin Gibbs. "We don't have Merck in any of our model portfolios and are not looking to add it in the near term," she added. "It's hard for me to recommend any stock that has declining earnings and sales."
Gibbs noted while Merck's newly approved drug Keytruda is viewed as a breakthrough drug and could be a huge seller, the stock is expensive and unattractive. "[Merck] is trading at 16 times earnings, so it's definitely trading at a premium to the overall market," Gibbs said. "For investors who already own it, hold it. But it's definitely not a buy."
According to Ari Wald of Oppenheimer, Merck's charts are setting up for steeper declines.
"If you look at the long-term chart, $60 per share really sticks out. That's the highest the stock has traded at since 2001. That's very formidable resistance," said Wald. When stocks hit a previous high, they often takea rest as investors look to recoup losses.
And in Wald's opinion, the stock will not be able to break about that key resistance level. "On the march to $60 per share [Merck] has lagged both the market and its sector," he said. "I see downside risk to $50 per share. Overall I'm avoiding it."