Mad Money

Cramer: Don't get your hopes up with the stock of Botox maker Allergan

Key Points
  • CNBC's Jim Cramer and technician Tim Collins review Allergan's stock charts to figure out what might be next for the Botox maker.
  • The "Mad Money" host issues a warning to investors about the challenges facing Allergan.
Don't get too excited about Botox maker Allergan

After three years of weakness in shares of Allergan, the pharmaceutical giant behind Botox, CNBC's Jim Cramer has started to wonder when the stock will finally hit bottom.

"The stock has been a terrible performer," said the "Mad Money" host, whose charitable trust recently sold the stock after weeks of declines. "But even if I’m wary of the fundamentals, it turns out that the technicals may be telling a different story."

So Cramer recruited technician Tim Collins, his colleague, to help with the technical analysis and figure out where Allergan might be headed.

And to Collins, the stock's recovery over the last two months fed into the story its charts were telling.

In his view, "Allergan just needed a little time to iron the wrinkles out, a Botox-like injection to smooth out the path for the bulls to follow," Cramer said.

"Or, to put it another way, this could be a situation where beauty is in the eye of the beholder," the "Mad Money" host continued. "And as far as Collins is concerned, the charts are starting to look downright pretty — at the very least, he thinks they’re showing some bullish signs that might eventually result in a non-hideous picture."

This pattern signified that as Allergan's $140 to $150 floor of support stayed the same, its ceiling of resistance changed. That led shares of Allergan to break out above two separate ceilings of resistance in recent weeks.

"Collins thinks that changes the game," Cramer said. "From these levels, he believes Allergan has a clear path higher for at least the next 10 points — so we could get to $186 without much difficulty."

The technician added that only one ceiling of resistance in the mid-$180s is now capping Allergan's run, meaning that if the stock breaks above that level, it could rally to the $200s.

In addition, Allergan's moving averages recently flashed a bullish sign. The 10-week moving average crossed above the 20-week moving average, which Collins took as a signal that the stock is ready to run.

But even with Collins' positive outlook in mind, Cramer still had reservations about Allergan's long-term prospects.

"I think we need to be skeptical because this is a situation where I think the charts may possibly disagree with the fundamentals," he warned. "I see some major competitive threats to its main drug, Botox, and I’m concerned that it’s got real risks as we get closer to its major patent expirations."

The "Mad Money" host pointed to Revance Therapeutics, a challenger to Allergan's Botox whose CEO he interviewed in April. He also noted that Allergan lost a key patent protection case for its $1.4 billion eye drug, Restasis.

"The stock has been one disappointment after another for years. So I don’t want you to get your hopes up," the "Mad Money" host warned. "The charts, as interpreted by Tim Collins, suggest that Allergan may be ready to roar here. I think the fundamentals tell you to be a little bit skeptical. To me, they’re saying you need to be careful with this kind of challenged pharmaceutical company, but I accept that Allergan's stock was overly punished and can continue to rally in the absence of any new negatives."

Allergan's stock settled at $175.95 a share on Tuesday, down 0.5 percent.

WATCH: Cramer goes off the charts with Allergan

Cramer: Don't get your hopes up with the stock of Botox maker Allergan
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