Gilead Sciences Inc. (GILD)

Stock has done very, very well, but in the last 6 months it has been a bit of hair pulling. Every quarter comes out and the results are better than the previous quarter and better than the previous year, and yet the stock is trading at less than 10X earnings. There are still a lot of things in the pipeline for the earnings growth to continue.

We had a biotech wreck. This one is barely down at all and report earnings tomorrow. It is one of the largest positions in his US Value 50 portfolio. 58% upside is his current prediction.

(Top Pick Sep 10/14, Down 1.55%) This is a really well run company. They are the global leader in HIV and Hepatitis medication. It had been growing a lot over the last year. Now the market worries how big and durable the hepatitis market is. They had the world’s most successful and largest drug launch in history.

(A Top Pick Oct 28/14. Down 5.12%.) This has almost moved completely sideways from when he made the recommendation. Going to own this for a long time.

His model price is $167, a 60% upside from here. This has had a pullback from the last time he was on ($119.07 on June 6, 2015), and he likes pullbacks. It has come back to his EVB+7, his structural line which gives it support. It had huge volatility and this had downside, but it snapped right back, which he likes to see.

(A Top Pick June 11/15. Down 2.6%.) Biotech has a period of seasonal strength from June 22 to September 12. Average gains during that time are about 12%. This one is a bit different in that it starts it seasonal strength at about May and runs through to September 12. It had a giant consolidation from about October to April and then broke above resistance, followed by an up leg, followed by another consolidation. There is nothing negative about the stock yet. You should expect to see higher returns ahead. On biotechs, there is a bit of a negative sentiment turning to them because investors are trying to gain a top in the market. Chart shows a bit of a head and shoulders pattern, and we are below the support right now.

People are a little worried about where future growth is going to come from. It has been driven primarily by one drug. You are always paying for the pipeline in drug manufacturers. There is not much of a ‘what’s next’.

Thinks it is a terrific company and has had strong earnings. They had thought about buying it, but talked themselves out of it. Gilead Sciences has a broad range of products. The problem is that they have a very expensive Hepatis C drug and wonders if they can keep this drug at this price. Didn't buy because they thought the margins of the drug would likely drop precipitously.

This is beyond his circle of confidence. He has no idea if their drugs are better than any other company. Valuation looks very attractive and are gushing a ton of free cash flow. There is a theory they are going to use it to increase dividends, buy back shares, or maybe make acquisitions.

This has the Harvoni-Solvadi drug for treatment of hepatitis C. Has had a lot of press about the cost of the regimen. They also have other things in the pipeline. Trading at about 14-15 times next year’s earnings, a very, very reasonable multiple.

His model price is $166.32, a 41% upside.

A lot of people on the street like this stock, but his concern is that 55% of their revenue comes from 2 drugs, both in the hepatitis C area, and are a cure. There is competition, so from an investment standpoint when you design or invent something that cures a disease, your market obviously goes away. Also, when other companies come out with competitive products, they are not only going to eat into your market share, but are going to eat into your margins, because they are going to fight you on price. Price is a very big issue with this company’s drugs. If their pipeline is not successful in coming out with more breadth, they are going to be exposed to lower prices on their products, lower volumes, and ultimately a shrinking market. The risk is too high for him.

The multiple is low because they have their new drugs for Hep-C that has the concern that there is competition coming. 45% revenue increase previously. They are doing fine with the competition coming out. He thinks the multiple has room to expand.

Biotechs in general tend to do well from June 22 all the way to September 12. The industry on average gains about 12% and has been positive 85% of the time. There was a bit of resistance broken in April, and is now at new highs. These new highs would just entice investors back into it. This is the largest in the biotech industry. Alternatively, you could look at Abbott Labs (ABT-N), more of a pharmaceutical company, which tends to do well from August into the end of the year.

Last December this stock had a bit of a hiccup, which was due to the push back on pricing. Last year they came out with a new class of hepatitis drug that is revolutionary. They are curing what are life-threatening diseases and are worth every penny of what they are worth. There has been some pricing pressure and is probably down to about $70,000 per treatment. Even after factoring this in, it is still trading at 9.9X next year’s earnings. Has a free cash flow yield of approximately 10%. They are buying back stock. He has a $149 target on it.