Rarely in a volatile stock market like this one, where major indexes routinely jump up and down more than 3% each week, do you see tight trading in a stock. But that's what we see in IBD 50 member Eli Lilly. The pharmaceutical giant has formed a three-weeks-tight pattern, which sets a new buy point for the stock.
Eli Lilly's pharmaceuticals treat neural, endocrinal and heart diseases, cancer and Covid symptoms. The company is scheduled to report second-quarter earnings next week. Keep in mind that it's best to use caution when buying stocks near earnings releases because missed expectations can trigger sell signals.
After a 40% jump in Q1 earnings, the consensus view of analysts tracked by FactSet is for a 9% decline in Q2 earnings to $1.70 per share. Sales are seen rising 3% to $6.849 billion.
For the full year, Wall Street predicts EPS will rise 2.6% to $8.37 on a 3% increase in sales to $29.16 billion.
The expected Q2 decline, along with predictions of tepid growth for the rest of the year, are flaws in Lilly's overall fundamental and technical picture. But the stock is holding tight right here, suggesting that institutional investors aren't ready to walk away from this leader.
High Ratings For Eli Lilly
Lilly, which is also a member of Investor's Business Daily's Big Cap 20 and Leaderboard, scores high in most other aspects. With a Composite Rating of 98, the company ranks No. 2 in its diversified medical group, according to IBD Stock Checkup. It also ranks No. 1 when listed by Relative Strength Rating and Accumulation/Distribution Rating.
It's a small group, containing just six stocks, but the diversified medical group sits at a lofty No. 19 out of IBD's 197 industry groups. That's up from No. 20 three weeks ago and No. 53 six weeks ago.
Lilly's three-weeks-tight pattern has formed within the buy zone of a recent flat base, according to MarketSmith pattern-recognition analysis. The stock broke out above the flat base's buy point of 314.10 on May 27. The buy range goes up to 329.
But it hasn't been all sunshine for the stock. Since the breakout three weeks ago, it has dipped back to near the bottom of the base before staging a strong rally. It re-entered the buy zone on June 24.
Now, with the completed three-weeks-tight pattern, investors have an alternative buy point at 335.43. That's 10 cents above the tight pattern's high point, which was reached on July 15.
Safe To Buy?
It's normally safe to buy a stock while it's trading within a buy zone. A three-weeks-tight pattern that offers an alternative buy point below the top of the buy zone is a good sign. It provides an extra measure of confidence that an investment in this stock could lead to meaningful gains. On the flip side, a sputtering stock market is a major wild card, adding risk ahead of the Aug. 4 earnings report.
