Bausch Health rises 25% on bad earnings – is this pump a trap for retail investors?

Bausch Health’s (NASDAQ: BHC) pre-market rally is causing the ears of investors to prick up as the word gets out. While the sentiment appears to be positive at the moment investors could be in for a rollercoaster at the bell. Considering the pre-market is a usually a façade for the trading day, many investors are skeptical as to whether the rally will hold up. Ultimately creating a division across Wallstreet. Thus, today’s article will explain to our viewers why BHC is up and whether retail investors should avoid the biotech.

Table of contents 
1. Why BHC is up 25% 
2. Should Investors worry about bad earnings 
3. Is the Bausch Health rise a sucker rally?

Bausch Health jumps 25% off spin-off business announcement

Bausch Health’s business is split into three medical areas. These include Eye Health, Gastrointestinal Diseases, and Dermatology which is run by Bausch + Lomb, Salix Pharmaceuticals, and Ortho Dermatologics, respectively. Today BHC announced that it is planning to spin off its eye-care business into a separate public company. Bausch + Lomb’s eye-care company accounts for 50% of the entire businesses revenue. Thus when BHC announced a spin-off  of their best subsidiary, investors went nuts. However, the likelihood that most retail investor are aware of the risks of a spin-off is quite low.

Essentially a spin off is where a parent company separates one of its subsidiaries and makes it a separate business. Part companies could spin-off a part of its business for two reasons. First if that part of the business is infecting the growth of the parent company. Second would be if the parent company is underperforming but a subsidiary is outperforming. In BHC’s case it looks like Bausch and Lomb is outperforming while the core parent company overall is underperforming. Hence the spinoff  is to give the eye-health subsidiary the best chance of reaching its highest value.

Investors will receive shares (stock dividends) in Bausch and Lomb in proportion to how many shares they own in BHC. Also, if BHC believe Bausch and Lomb offers a higher growth potential they may wish to offer BHC shareholders the right to exchange their shares for a discount. However, investors must understand that spin-offs tend to be more volatile, creating a higher probability for the downside. Also a large portion of Bausch and Lomb shareholders may wish to sell their spin-off shares, creating significant selling pressure.

BHC reported poor Q2 2020 earnings

  • Reported Q2 revenue at $1.664 billion, a 23% decline in comparison to Q2 2019
  • Bausch + Lomb/International segment of business took the greatest hit, losing 25% revenue in comparison to Q2 2019
  • Full year revenue guidance set to $7.80 Billion – $8.20 Billion, an extremely optimistic guidance forecast for investors.

“Since the COVID-19 pandemic began, our top priority has been to ensure our employees remain safe and that we have the necessary processes in place to protect our supply chain so that we can continue to provide access to our health care products to people around the world,” said Joseph C. Papa, chairman and CEO, Bausch Health.”

Have all the Bausch Health gains been made in pre-market?

Before I begin I am obliged to remind our viewers that this is not financial advice but rather investment commentary from extensive research 

Short answer: The odds of BHC rising at the bell are extremely low (opinion not advice) 

The lack of willing Bausch Health buyers

Investors looking to make a quick buck  with BHC might be disappointed. Because to make an intra day gain you need to do two things. First, you need to buy the stock, so you would need a willing seller. The current price of $23.30 (pre-market at the time of writing) will entice shareholders to sell their shares and thus allow most investors to buy the stock. However, once you own BHC you need a willing buyer to take them off you at a higher price. Considering BHC’s disappointing Q2 2020 earnings and the lack of knowledge about the risks of the spin-off  we should see a sell-off at the bell. In which case you are left with shares in BHC that lost their value faster than you could blink. YIG does not expose the potential shortcomings of an intra day investment to discourage investors but to simply provide a balanced perspective.

August 7th puts suggest a bearish BHC trend

Using the activity in the options market is an excellent way to gauge the underlying sentiment of the stock. In the case of BHC we will compare the volume of calls to puts in relation to today’s announcement. On the bullish side BHC calls at a strike price of $19.50 are the most traded, with a volume of 1,099. Those calls are already in the money, meaning the likelihood investors execute their right at open is high. Also, the call volume for strike prices higher than $19.50 becomes lower and lower, suggesting a lack of confidence in BHC. On the bearish side BHC puts with a strike price of $19.00 hold the most volume with 3,989. Hence many investors bought these puts today with a strong expectation that the price will drop down to $19.

Overall the imbalance between puts to calls and the pessimism of a drop at the bell will likely be a self fulfilling prophecy. Thus, the retail investor should avoid the BHC pump as it is most likely a suckers rally.

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The information above is not financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.

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Written by Patrick McLoughlin, Senior Manager of YIG.

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