A recent fifteen percent fall in most bio-tech stocks, including bio-tech giant Gilead Sciences brings us a great opportunity to profit from.
The following is what has made me add Gilead Sciences to my medium-term trading portfolio.
Please note, I am both a long-term deep value investor as well as a medium-term trader who utilizes the combination of both fundamental, technical and macro analysis to form a view of every investment I make. Doing so I believe leads to low risk and superior market beating returns over the long run.
Fundamental Factors;
The Bad
Earnings Per Share is forecasted to decline.
Interestingly this is primarily due to the remarkable success of two blockbuster Hepatitis C drugs, Sovaldi and Harvoni which had accounted for over 60% of Gilead’s 2015 revenues, and its success in curing their patients has led to fewer patients therefore needing them in the future.
There is also the potential for future Government enforced price regulations of certain drugs due to political pressure, which then affects the whole bio-tech industry.
The Good
Intrinsic valuation of $85-$90 (approx.), so GILD is at fair value for a well-managed growth company.
Priced at just seven times this year’s and next year’s earnings, which is cheap.
Earnings per share (EPS) have been great for the past 5 years.
Return on Equity (ROE) of over 80% is excellent but is unsustainable and is forecast to decline.
Long-term cash flow relative to reported profits is strong.
Gilead has a long term funding surplus.
Massive cash pile of over $21 billion dollars, even after stock buyback to fund future growth.
Stock buyback likely to continue, even after an $8 billion buy back in the recent quarter.
Technical Factors;
The Bad
Recently broken below the $86.50 key price support level.
Currently below all 20, 50 and 200 day moving averages.
The Good
The stock is oversold on a variety of momentum indicators.
Price is close to its 52 week low and seems to find key support at the $85 price level.
Other Factors
For longer-term investments and trades, I generally like to see who else is on-board with me and where the smart money has found its home.
In my opinion, actions always speak louder than words. Gilead is held by a couple of smart money managers.
Ronald Muhlenkamp – 6.63% of portfolio managed
Julian Robertson – 5.15% of portfolio managed
Conclusion
The recent 15% price fall in Gilead Sciences has brought the stock back to fair value for a wonderfully managed bio-tech company with smart money support.
I have just initiated a new position of Gilead Sciences for our medium-term trading portfolio.
This is not the time to be fearful on such a great opportunity which has continued buying back their stock in big volumes at the right price, thus increasing its own intrinsic value over time.
To see how you can easily and safely identify undervalued leading stocks like Gilead, click here.
