An article published Sunday published by my fellow Seeking Alpha contributor Shock Exchange advised investors to, as the piece is titled, sell Gilead into earnings. Shock Exchange cites potentially weak HCV sales and lower ASPs due to political and competitive pressures as the catalysts that will drive Gilead Sciences (NASDAQ:GILD) down after earnings Monday. The rest of the details can be found in his article here.
Those readers that pay close attention to Gilead on Seeking Alpha might recall my article from a couple weeks back titled "Gilead Sciences: Value Play Or Value Trap?" which can best be summed up by SA user DrKnight whose comment read "value trap short term value play long term". I think that is an apt description of my personal opinion on GILD right now. The market sees a company in decline, and Gilead has not done anything to allay those fears as of yet. Dominance of the HCV market is slipping and sales have likely peaked. Investors have discounted GILD accordingly:
Gilead's share price has suffered and the trailing P/E is so low it leads one to ask why. Well in my opinion I explained why in the last paragraph. The market looks in Gilead's future and sees uncertainty. The HCV business will leave a void that the company has not shown it can fill.
Before everyone gets on me about massive free cash flow, increasing HIV sales, and the promising pipeline, I will remind you that is besides the point. In the short-term, Gilead has nothing to buoy its results as its HCV business declines, therefore in the short-term the market will keep GILD's price down. But enough of this topic, if you want to read my take on Gilead's short-term and long-term value, you can view my article on that topic here.
I am writing this article in response to Shock Exchange's call to sell Gilead into earnings, a call with which I disagree. However, unfortunately for GILD longs, many of the negative developments we have been hearing about non-stop are grounded in reality. ASPs in the HCV segment will almost certainly be lower due to political and competitive pressures, and revenue will suffer.
Is Gilead a risk, or even probable, to move lower after reporting earnings after the close Monday? In my opinion, yes. Should investors sell their shares Monday to protect against the risk of downside? Absolutely not! The next few paragraphs will mostly be addressing those investors with mid-term to long-term investing horizons, which I think is likely the majority of GILD owners right now.
Because timing the market is futile and will lead to lower overall returns, when an investor purchases shares in a company expecting to hold it for more than a few weeks, it is my opinion that those shares should be tampered with as little as possible. There are too many unknown factors, not to mention tax implications, for it to be beneficial to play around with stock positions whenever the fancy arises. So even if you are 99% sure Gilead will miss estimates Monday, in the long-term leaving your investments alone is the optimal strategy. Fortunately there are other options available, no pun intended.
I am almost certain that Gilead will disappoint the market Monday and that the stock will go down. Yes, expectations are already low, but realistically Gilead doesn't really have any imminent upside catalysts with which to surprise the market. As I have stated in past articles, GILD trades on the performance of its HCV business. I see very little possibility of Gilead surprising to the positive side in that area.
With this in mind, GILD longs should want some downside protection in the likely chance that the company disappoints. If I were a GILD shareholder looking to protect my investment, put options would be my strategy of choice. I implemented this hedging strategy on Skyworks Solutions (NASDAQ:SWKS), the largest position in my portfolio, last week and the results were exactly as I had hoped.
Skyworks was trading just above $70 before reporting earnings Thursday, and I purchased put options expiring Friday with a strike of $69 to protect against the downside, which I was expecting. The stock dropped 10% after earnings, and despite SWKS being my largest position, I actually came out with a slight profit. Initially, the puts were just meant as a hedge option to lower my loss if the stock dropped, and it was just an added bonus that the drop was so large I was able to eke out a gain.
GILD investors might be wise to use a similar strategy on Monday to shield long positions from potential losses. The amount of hedging should correspond to both the size of your GILD position and the probability you place on a downward post-earnings move. Be advised, if the stock does not move much after earnings, puts may end up essentially worthless very quickly. For those investors that don't have a good grasp of options, be sure to do research and fully understand the financial instrument before using it; options can be very risky and dangerous if not treated with respect.
Put options give you a way to hedge and protect positions without trying to time the market which, unlike selling all of your shares, is a sustainable strategy that will keep your investments safe over the long haul. Not to mention that, if GILD does go down after earnings, the real gains from the put options can be used to purchase shares on the cheap (or one can exercise the contract of course).
To sum this article up, I think it is very likely that Gilead Sciences will drop after reporting earnings Monday. Investors might be wise to protect their investments, not by selling their positions, but by buying put options to hedge against downside risk.
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Thanks for reading!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.