Does Merck Belong in Your Portfolio?

With shares of Merck (NYSE:MRK) trading around $53, is MRK an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Merck is a global health care company that delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products, which it markets directly and through its joint ventures. The company consists of four operating segments: the Pharmaceutical, Animal Health, Consumer Care, and Alliances segments, and one reportable segment in the Pharmaceutical segment. Merck aims to provide valuable healthcare products and services to consumers, animals, and companies in need worldwide. Look for the company to see rising profits as it advances the products and services of the healthcare field.

Merck will work with three other drugmakers to find the most-promising combination treatments for its top pipeline prospect, an immune system-based cancer medicine. The collaboration boosted Merck's shares after the company reported fourth-quarter earnings that fell short of estimates. Earnings excluding certain items were 88 cents a share, 1 cent below the average of 15 analysts' estimates compiled by Bloomberg. The Whitehouse, New Jersey-based company also forecast 2014 profit of $3.35 to $3.53 a share, compared with $3.48 projected by analysts.

T = Technicals on the Stock Chart Are Strong

Merck stock has been in a range over the last several years. However, the stock is currently surging higher and looks set to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Merck is trading above its rising key averages which signal neutral to bullish price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Merck options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Merck options	23.05%	93%	90%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
March Options	Flat	Average
April Options	Flat	Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Merck’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Merck look like and more importantly, how did the markets like these numbers?

	2013 Q4	2013 Q3	2013 Q2	2013 Q1
Earnings Growth (Y-O-Y)	6.02%	-32.14%	-48.28%	-7.14%
Revenue Growth (Y-O-Y)	2.32%	-34.99%	-9.38%	-9.04%
Earnings Reaction	-0.21%*	-2.55%	-0.59%	-2.78%

Merck has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Merck’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Merck stock done relative to its peers, GlaxoSmithKline (NYSE:GSK), Novartis (NYSE:NVS), Pfizer (NYSE:PFE), and sector?

	Merck	GlaxoSmithKline	Novartis	Pfizer	Sector
Year-to-Date Return	6.61%	-3.33%	-2.25%	0.42%	1.36%

Merck has been a relative performance leader, year-to-date.

Conclusion

Merck provides essential healthcare products to consumers, animals, and companies around the world. The company reported fourth quarter earnings that fell short of estimates. The stock been in an up-and-down trend over the past few quarters, but is currently surging higher. Earnings and revenue figures have been rising over the last four quarters, which has left investors optimistic about recent earnings announcements. Relative to its peers and sector, Merck has been a relative year-to-date performance leader. Look for Merck to OUTPERFORM.