Gilead Sciences Inc. (GILD), according to Google Finance, "is a research-based biopharmaceutical company that discovers, develops and commercializes medicines. Gilead's primary areas of focus include human immunodeficiency virus (HIV)/AIDS, liver diseases, such as hepatitis B and C and cardiovascular/metabolic and respiratory conditions. The Company has operations in North America, Europe and Asia Pacific." The 125 billion dollar company has been on fire as of late and had provided amazing returns for its long-term investors. Despite its massive growth in price, we believe that there is still a lot of room for upside. We are confident in saying that for multiple reasons that pertain to the stock's fundamentals and technicals.
Some of the reasons why we are so bullish on GILD include:
- GILD currently passes the Equities Lab "Value Stocks with High Expected Growth Stock Screener" which has back tested to significantly outperform the market in the past.
- GILD has a below average forward PE ratio that suggests the stock is undervalued
- GILD has a very durable and improving income statement and balance sheet
- Analysts have given GILD many upward revisions to their EPS estimates over the past month and GILD scores a 9 out of 10 Equities Lab Buzz Score
- GILD is expected to continue growing at a huge rate in the coming years
- GILD's stock price is one of the most consistent and best performing in the market and it offers limited drawdown during times of market corrections and recessions
Value Stocks with High Expected Growth Stock Screener
The Value Stocks with High Expected Growth Stock Screener looks to locate socks with below average forward PE ratios with solid fundamentals and high expected growth. The conditions the stocks must meet are:
- The one year and two year forward PEs must be at least 25% less than its industry average
- The analyst expected 5 year growth rate must be greater than 15%
- The stock's price must be within 20% of its all-time high
- Sales growth from 5 quarters ago to 1 quarter ago must be greater than 5%
- The Equities Lab Income Statement Score must be greater than 6 out of 10
- Market Cap must be greater than 8 billion
The stocks that currently pass that criteria are Google Inc. (GOOG), Home Depot Inc. (HD), Lowe's Companies (LOW), CBS Corporation (CBS), United Rentals Holdings (UAL), Hertz Global Corporation (HTZ), Whirlpool Corporation (WHR), Tractor Supply Company (TSCO), and Gilead Sciences .
We are so confident in this strategy because of the great performance in our back test.
The graph above shows the back test return for the strategy. The green line represents the portfolio return if you would have bought the stocks that passed this strategy and sold them when they no longer passed since 2003 up until today. The blue line represents the Russell 2000 and the grey line represents the S&P 500. The turquoise line represents the average trailing 12 month sales growth of the stocks that passed the strategy at any given time. As you can see that line normally hovers around 20-25% over the past 4 years.
The green line produces a 19.63% annualized return from Jan 3, 2003 to Feb. 19, 2014 while the S&P 500 only returns 6.51% annualized. This huge outperformance is why we are confident recommending the stocks that pass this strategy.
Other Reasons why we are Bullish on GILD
1. Of the 20 public biotechnology and drug companies with a market cap greater than 50 billion, GILD has the highest analyst estimated 5 year growth rate of 34.7%. The next highest company is CELG with 24.2%.
2. GILD's one year forward PE is currently 22.6 while the average one year forward PE of companies with a market cap greater than 25 billion, an expected 5 year growth rate greater than 20%, and a one year forward PE less than 150 is 26.4. GILD's two year forward PE is 14.8 while the average of companies with a market cap greater than 25 billion, an expected 5 year growth rate greater than 20%, and a two year forward PE less than 150 is 18.7. Since GILD is expected to grow at a huge rate over the next 5 years, we believe its forward PEs should be at least 25% higher than they currently are. A price of 25% higher would put GILD's one and two year forward PEs at about the average of similar stocks.
3. The quarterly and yearly income statement and balance sheet show strong and improving fundamentals.
Sales grew 15.5% from 2012 to 2013 and 15.7% from 2011 to 2012. Gross margin was 75% in 2013, which was a small improvement from 74.5% in 2012 and 74.6% 2011.
Sales in the 4th quarter of 2013 grew 21% from the 4th quarter of 2012 and 12% from the 3rd quarter of 2013. Gross margin consistently was very strong around 73% for the 4th and 3rd quarter of 2013 and the 4th quarter of 2012.
GILD's cash balance has been rapidly increasing; growing 27.8% from the 3rd to 4th quarter of 2012.
4. The short term catalyst for GILD has been the upward revisions towards its estimated EPS. The following graph (taken from Yahoo Finance) represents the revisions:
In addition to the upwards revisions, GILD also scores a 9 out of 10 on the Equities Lab Buzz Score. The Equities Lab Buzz Score is a measure of bullish insider, institutional, and analyst activity surrounding a stock. The score is calculated using the conditions represented in the screenshot below:
The conditions from top to bottom are: estimated EPS growth over the next year must rank in the top 35% of the market, the EPS estimate for 2014 must be greater than it was 1 month ago, the EPS estimate for 2015 must be greater than in was 1 month ago, the number of upwards revisions must be greater than the number of downwards revisions for 2014, insiders buy trades must be greater than insider sell trades, institutions must be accumulating shares, the most recent quarterly surprise must be positive, more analysts are covering the stock compared to 2 months ago, sales growth from the 4th quarter of 2012 to the 4 quarter of 2013 must be greater than 5%, and 2013 EPS must be greater than 2014 EPS. GILD passes 9 out of those 10 conditions.
Buying stocks when they had a buzz score of 9 and selling them when the buzz score was no longer 9 would have given you a 27.5% annualized return from Jan. 1, 2010 to Feb. 19 2014 according to our back test.
5. One of the most desirable traits for GILD is its price performance. The graph below represents the year by year breakdown of GILD's performance compared to the S&P 500.
In the 12 years this graph covers, GILD outperforms the S&P 500 in 10 of them; including each of the last 4. The most impressive year was 2008 when the market crashed nearly 40%, but GILD produced a positive return of 11.9%. In 2014, GILD is off to a flying start. The stock is already up over 10% while the S&P 500 is down about a half percent. We expect the stock to build on its great start in 2014 and hit new all-time highs.
GILD has a high price to sales ratio of 11.1. Many people would claim GILD to be overvalued because of this and they may have a point. Let's look deeper into the biotechnology and drug industry to see where GILD's price to sales stands. In the chart below I have listed GILD's main industry competitors:
|Ticker||Price to Sales||Market Cap (billions)||Est.5 Yr. Growth|
This table, to us, says that GILD's price to sales is fair despite it being 11.1. Out of every stock listed in the graph, GILD has the highest estimated 5 year growth rate at 34.7%. The next highest is CELG at 24.2% and the average for the stocks listed is 17%. Given that GILD is expected to grow at such a fast rate over the next 5 years, it should be trading at a higher than average price to sales ratio than its competitors, and it is. The average price to sales ratio of the stocks listed is 9.44; a 15% discount to GILD. If we only include stocks that are expected to grow faster than 10% per year then the average price to sales is 12.7 which is a 14% premium to GILD. The one year forward price to sales for GILD is around 7.7 and the two year forward price to sales is 5.9. If we believe that a price to sales of 9, which is conservative, is fair for GILD over the next couple of years then the price has to grow 17% in 2014 and a total of 53% in 2014 and 2015 to trade at that price to sales of 9. With that being said, we believe GILD's price to sales of 11.1 should be of zero to very little concern to investors.
There a numerous reasons why we are bullish on GILD including: GILD passes our Value Stocks with High Expected Growth stock screener that has back tested to significantly outperform the market in the past, it has below average forward PEs that suggests 25% upside, it has a strong and improving income statement and balance sheet, many analysts have recently revised their EPS estimates upwards over the past month, GILD scores a 9 out of 10 on the Equities Lab Buzz Score, GILD is expected to grow at a rate of 34.7% which is well above the average for mega cap biotechnology and drug companies, and finally its price performance offers great returns with limited draw-downs in times of market corrections. All of the reasons mentioned above along with many others will create more individual and institutional demand for GILD over the coming years. We believe that by the end of 2014 GILD should be trading at $100 per share.