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Battleground stock Amgen (NASDAQ:AMGN) is a large cap and is considered a value play. However, if you were long this stock for the past 15 points lower, you would probably call it a “value trap.”

The analyst community has been dead wrong on this stock as it has had many issues with drugs on the market and some that are in testing. One analyst I follow for AMGN, Mark Schoenebaum of Bear Stearns, has been staunchly bullish on AMGN from the low 70s down to the midpoint in the 50s. He has stayed positive even as the stock has continued to fall as the momentum traders jump in and the value guys exit. However, the negativity around this stock is rather high and given its point relative to past metrics, I think the stock may have some support in the current area.

My basis for this assumption is based on two main facts. First, say all the bad news has been priced into this stock. That implies that the stock may be one of those situations with much larger upside in store than downside – one of those Cramer statements, “up 2, down 1.”

Supporting this case, say that the bottom estimate for 2007 and 2008 numbers (from Yahoo Finance) for AMGN is taken into account (4.03 and $4.20 respectively). That would mean that the stock is trading at roughly 14x 2007 numbers and less for 2008. This growth number is roughly in line with the S&P and since the multiple is less than the forward multiple for the S&P, that means the stock is trading cheap to the market.

Being more aggressive, say you follow Schoenebaum’s numbers of $4.03 for this year and $4.40 for next year. That is 9% growth for a stock that is trading at 12x earnings. While it is a bit more expensive than my normal entry for the CPS (less than 1x growth and greater than 15%), I think this is an opportunity here. Also, the way the market is behaving lately with this stock, it is trading as if earnings growth will be flat year over year. Thus with the negativity great, the earnings picture may be much brighter than believed.

So you have an intriguing fundamental story and if you take into account my trading model along with the chart, you end up with a situation that could set up for a bounce over the course of this year. That is why I have purchased the stock as I think the news is priced into it and the situation is supportive for an upward move over the next 12 months.

Fundamental View
As I mentioned, I follow Mark Schoenebaum’s view on this stock on the fundamental side so based on his analysis, I will go with his assumptions for AMGN – 2007: $4.03, 2008: $4.40. The market is much higher on the 2007 numbers but essentially inline with his estimate for 2008. He is looking for a flat performance in most products of AMGN through this year and a drop off in Aranesp sales in 2008. He forecasts a modest rise in the Enbrel franchise.

However, I think, since I suffer from a form of arthritis and have heard some anecdotal comments on the franchise from others, Enbrel may actually turn out to be stronger than expected. This would mean there is an upside surprise to his numbers and to AMGN as a whole. So essentially, I argue that $4.03 is acceptable at this point – I think it could turn out to be greater.

The Trading Model
The Trading model shows AMGN is its most oversold state since the early part of 1993 and somewhat similar fashion to last spring. Relative to a fair value metric I use, AMGN is undervalued and oversold relative to this metric in similar fashion to a bounce that took the stock from $65 to $75 last year. Earnings momentum models are turning lower though I think this could be a case that the market is pricing in an event before it materializes – thus shooting now and asking questions later. This sector of Biotech stocks was much oversold recently and due for a broad bounce which supports AMGN. While I do not expect the stock to trade over $100, I think a meaningful bounce could occur into the $60s.

The Charts
The chart for AMGN shows an interesting setup for a bounce. First, this stock has hit the 65 month moving average three times over the past 10 year and each time the stock has found stability. In addition, AMGN has fallen back to the bottom of a trading range that was set in the middle of 2004 and right above the previous lows in 2003. Selling pressure holds leadership at this point but is sitting around similar levels to the last retest of the 65 month moving average (which implies a possible top to selling pressure). Lastly, the weekly chart has a double bottom in play now around the $55 level. Taking all of this information, if one were trying to buy a stock at support, AMGN would be it.


Summary
So in the end, I find that support for my purchase of AMGN sits with the charts, the fundamentals and within my trading model. There are a few headline risks to still deal with on the legal side so I would imagine it will be a hesitant rise if anything over the next few months. However, given the risk reward, and my long term view of the purchase (I own long term calls), I am looking for higher prices 12 months from now.

Source: Amgen: Bad News Priced In, Growth On The Horizon