With the self-destruction of Donald Trump’s presidential campaign, it seems like the market is pricing in a Hillary Clinton presidential win come November 8th.
In particular, the biotech and major pharmaceutical companies have been smashed over the past half year, with some stocks like Gilead losing almost 30% in this short period of time.
While drops like these may rattle the impatient and fearful investor or trader, we as value investors should be licking our lips for such a tasty opportunity.
The following is what’s making me add even more Gilead Sciences stock to our long term investing 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.
Return on Equity (ROE) of over 80% is excellent but is forecast to decline as well.
The biggest risk here is the potential for future government enforced pricing regulations of the pharmaceutical and biotech industry as a whole if Clinton comes into power post November US elections.
The Good
Fair value with intrinsic valuation of $72-$80 (approx.).
Priced at less than six times this year’s and next year’s earnings. If this isn’t cheap, I’m not sure what is. The ‘Clinton fear factor’ seems to already be priced in.
Earnings per share (EPS) have been great for the past 5 years.
Long-term cash flow relative to reported profits is strong.
Gilead has a long term funding surplus.
Massive cash and investments of over $22 billion dollars on its Balance Sheet.
Consistent big stock buybacks is likely to continue.
Technical Factors;
The Bad
Recently broken below the $78 key price support level, with next key price support at $70.
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 3 year lows at current price levels.
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. GILD is held by a lot of smart money managers.
Ronald Muhlenkamp – 7.073% of portfolio managed
Jerome Dodson – 3.23% of portfolio managed
David Carlson – 2.77% of portfolio managed
Zeke Ashton – 2.71% of portfolio managed
Samuel Isaly – 2.01% of portfolio managed
Conclusion
The dramatic 30% price fall of Gilead Sciences in the past half year has brought the stock back to below fair value for a wonderfully managed bio-tech company with plenty of smart money support.
To avoid catching the proverbial falling knife, we’ll wait for a buying momentum shift upwards before adding any more Gilead Sciences for our long-term portfolio.
With Gilead continuing to buy back their stock in big volumes, thus increasing its own intrinsic value over time, this is definitely not the time to be fearful when such an opportunity exists. The most important bit is to position size accordingly and build a position over time and not rush into it. Patience is key.
To see how you can easily and safely identify undervalued leading stocks like Gilead, click here.
