Foamix Pharmaceuticals (NASDAQ:FOMX) has struggled with finding and maintaining value in recent years, seeing its stock chopped from $11.27 early in 2017 all the way down to $1.97 in July.
Part of the reason has been a lack of trader appreciation for drugmakers in general against the backdrop of constant bickering in Washington that healthcare costs need to be cut, starting with drug prices. Secondly, investors have historically seemed to have shied away from big valuations for pharmas in certain areas, including dermatologic indications.
When Foamix came out last month and said it was going to merge with Menlo Pharmaceuticals (NASDAQ:MNLO) in an all-stock deal, shares were up at $4.35 and trending upward. The reaction to the merger news, which would created a much stronger company with several drugs not far off (by biotech standards) from potentially being commercialized, has been poor to say the least. Shares have skidded back to around three bucks each. Shares of FOMX closed up 2.3% on Friday at $3.06.
We see a technical component to the FOMX chart at this point. By closing up Friday, shares are trying to get back on top of a trend line from the bottom this summer. Also we notice that the 50-day moving average (DMA) and 200-DMA are next to each other, a sign a bigger move is likely going to happen. Granted, the moving averages running side-by-side doesn't tell you which direction the move will be, only to watch for one.
We want to see the stock price jump back over the key moving averages to feel like Foamix is getting a bullish vibe. Watch for resistance in the future at $3.40 and then a tough resistance at $3.70, followed by $4.00. We believe that FOMX could continue on the current uptrend, which would mean a move handily over $4.00 (more likely to $4.50+), but we're setting our price target at $4.00 because of some uncertainty with the whole Menlo merger.
To the downside, we see some good support at $2.80. We see more around $2.50, but we simply can't feel good about FOMX if it starts straying too far from the trend line. Our stop/loss is going at $2.65 to protect against any more negativity from Wall Street.
This is an interesting one because normally we don't mess with merger plays because they generally don't have a lot of price movement in them once the deal is announced. Foamix is certainly different and we want to see what happens here.
In fact, it is probably worth much more due diligence than we do with these daily technical picks. Jumping in Monday at $3.06 provides a nice upside of 30.7% to our price target at $4.00, while the risk is just 13.4% to the $2.65 stop/loss.
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