Gilead Sciences: An Alpha Stock Through The Good And Bad Times

| About: Gilead Sciences, (GILD)


This article uses the Capital Asset Pricing Model to compare the risk-return metrics of Gilead Sciences (GILD) against Allergan (AGN), Amgen (AMGN), Biogen (BIIB), and Novartis (NVS).

Regression analysis demonstrates Gilead Sciences (GILD) to have a positive Jensen's Alpha value of 0.14% for the period 2006-09, and 0.02% for 2011-14.

The study also shows that Gilead Sciences is the only company to yield a positive alpha value across both periods in question.

In this article, I use a Capital Asset Pricing Model regression analysis to demonstrate that Gilead Sciences (NASDAQ:GILD) is the only company out of five selected biopharmaceutical companies that has outperformed the S&P 500 during a period of both market growth and decline. Since late 2011, the company has shown an overall return of 414%, which greatly exceeds the S&P 500 return of 69% during the same period. Additionally, while many biopharmaceutical companies showed negative returns from 2006 to 2009, GILD still showed a positive return of 46% during this period. As a caveat, this study only considers the historical performance of Gilead Sciences on a risk-return basis. In this regard, it should be considered merely a starting point for investors who wish to conduct a deeper business analysis of the company.

Capital Asset Pricing Model

This study compares the risk and return characteristics of Gilead Sciences with Allergan (NYSE:AGN), Amgen (NASDAQ:AMGN), Biogen (NASDAQ:BIIB), and Novartis (NYSE:NVS). Using a risk-free rate of 0.04% (the current rate on the 1-month US Treasury Bill), I regress 800 days of trading data against the returns of the S&P 500 for a 1) period of positive growth - 15th September 2011 to 19th November 2014, and 2) a period of negative growth - 15th September 2006 to 17th November 2009 to determine each company's Average Daily Return, Beta Value, R-Squared Value, Expected Return, and Jensen's Alpha. Company returns minus the risk-free rate are the dependent variable, and market returns minus the risk-free rate are the independent variable.

- Average Daily Return vs. Expected Return: The average daily return shows the actual percentage daily return of each company over the given time period; this is the benchmark that we use against the expected return (the return that the CAPM says we should receive for holding the stock) to determine if a stock is undervalued or overvalued. The expected return is defined as the risk-free rate plus the product of the company's beta and the average daily market return, i.e. Risk-free rate + ß(Average Daily Market Return) = Expected Return. If the stock lies above the Security Market Line, it is undervalued. If it lies below, it is overvalued.

- Beta: This figure tells us how volatile a company's price is relative to its market index. In this case, a company with a beta of less than 1 is less volatile than the S&P 500 Index; a company with a beta of greater than 1 is more volatile than the S&P 500 Index.

- R-Squared: The R-Squared figure indicates the degree of the company's returns that can be explained by the market return, e.g. a company with an R-Squared of 100% means that 100% of the company's returns are "explained" by the market. Conversely, a company with an R-Squared of 0% means that none of the company's returns can be explained by the market return.

- Jensen's Alpha: Jensen's alpha indicates the excess return generated by a stock over its expected return according to the CAPM. If a company has an average daily return greater than the expected return, then the excess return is defined as Jensen's alpha.

September 15 2011 - November 19 2014

For this period, we can see that four of the five companies are significantly undervalued in that the average daily return exceeds the expected return - or the return that the CAPM says we are entitled to for taking on risk. We can see that the Jensen's Alpha for Gilead Sciences is the highest at 0.14%, with an average daily return of 0.18%. Interestingly, for this period we can see that the Security Market Line slopes downwards, which implies that there is less reward for taking on greater risk. In this regard, Gilead Sciences has a very low beta of -0.01, and an R-Squared of 0.00%, implying that the market return accounts for virtually none of the return of Gilead Sciences over this period.

Sources: Author's Calculations/Yahoo Finance

September 15 2006 - November 17 2009

For the period 2006-09, we can see that of the five companies in question, only Gilead Sciences has a positive Jensen's Alpha of 0.02%. Additionally, while many companies in the industry experienced negative overall return, Gilead Sciences showed an overall return of 46.69% during this period. Additionally, Gilead Sciences had a beta of 0.62 for the period, along with an R-Squared of 27.96%, implying that 27.96% of Gilead's returns are explained by the market return.

Sources: Author's Calculations/Yahoo Finance


In conclusion, Gilead Sciences has shown positive alpha performance on a statistical basis compared to its peers. While this study has not examined the business fundamentals of the company, the analysis yielded so far seems to illustrate that Gilead Sciences has favourable risk-return metrics and in my opinion, would warrant further study for those wishing to examine the sector more closely.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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