Gilead (NASDAQ:GILD) has been one of the best overall investments for investors since 2011 earning 500%. However, last year it earned only 4.5% due to future growth uncertainty beyond HIV and HCV. In 2015, Gilead's management also established a 1.75% dividend to return capital and increased buybacks to improve shareholder value.
2016 will be a very volatile year overall for the market. With a strong dollar and economic decline overseas, growth percentages will decline slightly, pressuring stocks further. If I had to turn to a company to park my capital, Gilead would be near the top of my list. Gilead is a safe haven for investors. With a P/E of < 9, Gilead is not only a value play but potentially a growth play once Gilead makes an acquisition to boost earnings. However, Gilead is not in a hurry and thus the market has priced this uncertainty accordingly.
John Martin and his team have a stacked pipeline in oncology, HBV, cardiovascular disease, and inflammation as well as improved regimens in HIV and HCV in late stage development. Between the HIV and HCV franchise, Gilead generates >$23B in revenue annually with a > 90% profit margin. Despite increased competition in both fields, Gilead is still envisioned to be the market leader for each therapeutic area in 2016 and beyond. Gilead's BD team strategically picks companies that not only fit in with their strategy but have long term value to their portfolio. Even though Gilead has roughly $25B in cash ($10B from debt), don't expect management to rush an acquisition. Gilead is a long term play but as most of my colleagues say, I want to make money now.
Here are my two lucrative moves on Gilead for 2016:
Buy a vertical spread deep in the money. (I do this with a portion of my portfolio every year in stable stocks I feel comfortable with and the returns are spectacular.) For example, what if I were to tell you that you could buy the January 20, 2017 $75 strike and sell the $80 strike for approximately $3.85/share (midpoint). That would represent a 29.8% annual return. Not too shabby for allowing a 20% drop from today's closing share price. A drop to $80/share would represent a P/E of about 7. I don't see that coming for Gilead in 2016. If you feel more adventurous because you know Gilead will be buying back more shares this year as part of a prior $10B share buyback program, the $80-$85 midpoint is $3.55/share representing a potential 40.8% annual return with 14% downside cushion.
Sell a covered call. If you bought at the close today at $98 and sold the January 20, 2017 $100 strike for $10.50/share (midpoint), that would represent a 10.7% upfront premium plus the 1.75% dividend providing over $12 of downside protection per share and up to a 14% annual yield. This strategy is very conservative and should provide alpha in 2016.
Last, you can hold Gilead shares long this year and collect your 1.75% dividend guaranteed. For the long term investor, this is a safe move but the waters in 2016 are likely to become turbulent and this provides no downside protection. Best of luck in your trading this year.
Disclosure: I am/we are long GILD.
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.
Additional disclosure: This article is not investment advice and is my opinion. I am not an investment adviser and any trades should be carefully considered prior to placing an order.