Gavekal Capital: Merck's Orderly Liquidation

Wednesday, November 6, 2013

Merck's Orderly Liquidation

We received a question today as to why we don't like Merck among the major pharma companies.  In short, the stock shows all the markings of an orderly liquidation.  We measure the daily percent change and standard deviation of those price changes everyday.  The relationship between the daily percent change and the standard deviation of those price changes we have named the "Allen Ratio" in memory of our friend and mentor Clay Allen who pioneered (and taught us) this method.  Merck scores the lowest of all the US pharma companies on this measure with a -.49%


We compile a year's worth of data to look back on the statistical footprint of all companies.  Ideally, one wants to find a company in a persistent uptrend characterized by a negative skew and small kurtosis.  What this means in non-stat speak, is that the stock is notching small gains everyday with a low measure of dispersion around those daily gains.  Underneath the randomness of the market, stocks display strong trend characteristics.  In this case, the trend characteristics are quite negative--at least compared to the other US pharma companies.