The Teva Rally: Tread Carefully

Teva Pharmaceutical Industries Ltd (ADR) (NYSE: TEVA) shareholders are jumping for joy on Monday after the market gave new CEO Kare Schultz a warm welcome in the form of a 21 percent gain for Teva stock. However, once the euphoria of a new CEO wears off, traders should be looking for the reality of Teva’s situation to set back in.

Despite Monday’s big gain, Teva shares are still trading well below where they were in early August, when a guidance and dividend cut blindsided the market and sent the stock tumbling. The stock plunged from a July high of $33.67 to as low as $15.22 last week.

Analysts piled on with eight downgrades following the August guidance cut. On Monday, Teva shareholders enjoyed a rare upgrade from Wall Street when BTIG raised its rating to Buy on news of its new CEO.

Tread Carefully

While a change of leadership can certainly be grounds for a shift in a stock’s outlook, the market’s positive initial reaction isn’t always indicative of a longer-term trend change. Both General Electric Company (NYSE: GE) and Ford Motor Company (NYSE: F) recently replaced CEOs after extended periods of underperformance. Both appointments were followed by an initial pop in the stock before the stocks subsequently drifted back to new lows in the weeks that followed.

For Teva traders, the first indication of whether or not the market is taking Teva’s new CEO seriously will be Monday’s closing price.

If the stock pares a significant portion of its gains into the close, it will be a sign that part of the big move was momentum traders and short covering. Trading action throughout the rest of the week will also be critical in determining whether or not Monday’s big move was a trend reversal or simply a one-day bounce.

Related Link: Teva's New CEO Is A Positive Catalyst

Joel Elconin contributed to this story.