Eli Lilly's Stock May Drop 7% Short-Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Eli Lilly and Co.'s (LLY)  stock has soared 33% in 2018, bucking the broader stock market sell-off. But now technical analysis suggests the stock may fall 7%. The potential decline comes as the stock's PE ratio has reached its highest levels since 2016. 

Analysts have been increasing their earnings estimates for the fourth quarter over the past month. But earnings growth is expected to slow significantly in 2019 and 2020. 

LLY data by YCharts

Bearish Charts

The chart shows what may be the making of a technical pattern known as a double top, a reversal pattern suggesting the stock may fall. Should the stock fall, it is likely to drop to technical support of around $106.00, from its current price of about $112.60.

The relative strength index (RS) has also been trending lower since peaking at overbought levels above 70 in August. The RSI has been falling despite the stock rising, which is a bearish divergence, also suggesting the stock may decline. 

Raising Estimates

Analysts have increased their fourth quarter earnings estimates for the stock by 4% over the past month to $1.35 per share. Now analysts see earnings climbing by 18.5% during the quarter versus the same period a year ago.  Revenue estimates have remained unchanged and seen growing just 2% to $6.3 billion. 

Full-year estimates have risen 3% over the past month to $5.58 per share and are now expected to grow by 30% in 2018. Again, revenue growth is forecast to be much slower at just 7% to $24.4 billion. 

Overvalued

The significant earnings growth of 2018 is expected to slow to just 3% in 2019. Couple that with a stock that is trading a 2019 PE ratio of 20. Since 2015 the stock has traded in a PE range of 14 to 25. But the stock hasn't traded with a PE ratio above 20 since early 2016, making shares historically expensive. 

Fundamental Chart data by YCharts

With much of the earnings growth now behind the stock and slower earnings growth in 2019, the chart may be reflecting a change in sentiment. It may be a sign the stock is ready to give back a portion its 2018 gains. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.