A victim of its own success

The Wall Street is a weird animal that often does something hard to understand. It can blow a stock price to the moon simply based on a fantasy idea or a big plan, even if the company is bleeding all the way along without madding any money. Tesla is one typical example. Then it can punish a well-run money-making and hugely profitable company by cutting its stock price to the bone. Gilead (GILD) a good example we are seeing right now.

 

Gilead is one of the most successful biotech companies in history and is extremely profitable. It used to be considered as a HIV company as its main focus few years back was about HIV products. About 2 years ago, it totally changed its fame when it became the first company marketing the extremely effective hepatitis C drug, Sovaldi. This drug could virtually cure the life-threatening HCV infection. The huge demand immediately brought a windfall to Gilead and in the first quarter of Sovaldi’s debut, it already generated billions of sales for Gilead. I don’t think any company with any drug has ever achieved such a commercial success before! Well, huge success will always create huge expectation and euphoric chasers, which by itself is a double edged sword. Unless the company can maintain this kind of heightened momentum, it will disappoint the Street sooner or later. Gilead is exactly following this path and becoming a victim of its own success at the moment!

 

With fierce competition emerging in the HCV market with more new approved drugs available now, there is no way Gilead can still keep its HCV sales growth as expected by the Street and the latest “disappointing” quarterly earnings seem like a total surprise to its investors. They dumped the stock as if there were no future anymore for Gilead. What a typical stupid overreaction we have been seeing again and again. As a contrarian investor, I’m happily waiting for this moment to buy a good discounted stock I like. Gilead is still controlling 80-90% of the HCV market and over 50% for HIV. It is a hugely profitable company you rarely see in others: profit margin at 50.5% and return on equity at 99%. It is a cash cow producing nearly $18 billion in free cash flow and  has a huge cash pile with over $20 billion in hand. Around $80, it is extremely cheap by any means with a PE around 7. Because it has so much money, it has started to pay dividends since last year with a respectful yield at 2.3% at the moment. Moving forward, Gilead has good a pipeline for new drugs including hepatitis B virus (HBV) and NASH (non-alcoholic steatohepatitis). With a rich cash amount in hand, Gilead is openly talking about potential sizeable M&As to enrich its pipeline. One exciting area I’m sure Gilead is looking for is the hot immune-oncology horizon. It may use its cash to jumpstart in this new area to ride the unstoppable uptrend. Aside from its fundamentals, its technical setup is also quite strong for its next leg up. Actually from the technical perspective, this big selloff is necessary to create a strong positive divergence with MACD to support its bottoming process and start a new uptrend. I think $80-ish is likely the bottom of the one year correction for Gilead and I’m quite happy to establish a position for it!