Shares in Cochlear (ASX:COH) have done extremely well in the last several years. At the end of November, we saw an all time high of $186.77 for Cochlear before the shares drifted back. With the company due to report on 13 February, does recent weakness represent an opportunity to buy? Lets have a very quick look:
Despite the market falling in the last couple of days, Cochlear shares still do not look cheap. Based on FY18 forecasts, it is trading on a P/E of about 39x. According to FNArena, the 7 brokers who cover the stock rate it as a “hold” or a “sell”. The 12 month consensus target is at $150.40. This target represents over 11% downside. They could be wrong, and it wouldn’t be the first time that analysts have been bearish on Cochlear. Most analysts seem to be positive on Cochlear’s prospects, and can see the potential for positive earnings surprises. But it is hard to justify at current prices. There is a risk that buying Cochlear here will not leave investors with room to move if their half year results are not up to scratch.
The long term trend is still up and the bounce since mid-January has been encouraging. However, the peak last year produced a classic reversal signal – the evening star formation (circled). As Cochlear moves back up towards $180, it is likely to see further selling pressure. Unless Cochlear can push past this evening star, it is likely to keep falling. To buy an expensive stock that is trying to retest an old high is a risky situation. It might be best to wait for the results and take it from there. If Cochlear starts to get sold off, then we would expect support co come in near $160. If that gets broke, then we are looking at the low $140’s .
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Michael Gable is managing director of Fairmont Equities.
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