It’s not a stretch to figure out from its name that Conceptus (Nasdaq: CPTS) is a leading player in the birth control market.

Its mainstay procedure, called Essure — which can be performed without general anesthesia at a doctor’s office in less than 10 minutes — received approval by the U.S. Food and Drug Administration in 2002. Since this time, the California-based company has had a virtual worldwide monopoly on its billion-dollar market.

That was until a year ago. Last July, rival medical device maker Hologic (Nasdaq: HOLX) received approval to market a competing birth control system, called Adiana.

Hologic now threatens Conceptus’ dominance, and this threat can be seen in CPTS’ share price.

Additionally, due to high unemployment rates, costly visits to physicians have fallen in the United States, a trend that’s hurting the company. Fewer people are seeing their doctors and spending money on the Conceptus’ device. A few days ago, CPTS went so far as to dramatically lower its second quarter and full-year outlook.

Technically, CPTS is showing weakness. In late February, the stock hit a two-year high at $22.44. But since encountering resistance at this level, CPTS has been dropping steadily.

An intermediate-term downtrend line has now formed. And CPTS is currently well below this downtrend line.

In late March of this year, CPTS bearishly broke its year-long major uptrend line that had been in place since March 2009, when the stock hit a low of $10.26. At the same time, CPTS fell below its downward-sloping 10-week moving average.

In May, the 10-week moving average then bearishly crossed below the downward-sloping 30-week moving average. At this point, the stock also fell below the 30-week moving average.

Important support was then broken in late May and again in mid-June when the stock fell below $16.75. New 52-week lows were established at these points.
With the stock plummeting below support near $14.50, the shares could now easily fall to $10.80 before encountering historical support dating back to October 2008.

Meanwhile, the indicators are bearish. MACD entered into a sell signal in late March and the histogram keeps building further in negative territory. The major relative strength index (RSI) uptrend line was also broken. RSI is now in a downtrend.

Stochastics is deeply oversold, but is on a significant sell signal. Weak stocks can become and remain oversold for long periods of time.

The forecast for the company doesn’t look much better at this point. As I mentioned earlier, Conceptus recently cut its outlook. For the full year, the revenue forecast was cut to about $145 million from a previous forecast of $165 million, and the earnings forecast was slashed to $0.26 per share from the previous prediction of $1.04.

Conceptus is also richly valued, particularly in comparison to its main competitor, Hologic. Consider the following:

• CPTS has a trailing price-to-earnings (P/E) ratio near 40. In comparison, HOLX’s trailing P/E is roughly 25.

• As well, HOLX’s price-to-sales (P/S) ratio of 2.3 is far lower than CPTS’s 3.6.

• The same goes for the price-to-book (P/B) ratio for the two companies. CPTS carries a ratio of 8.0. In comparison, HOLX’s ratio is only 1.3.

Action to Take –> Given that Conceptus is overvalued on several metrics, faces increasing competition and is technically vulnerable, I plan to short the company.

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