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Portfolio Updates – Week Ahead 11/24/14

|Includes: Gilead Sciences, Inc. (GILD)

Market and Meaning is my weekly update on market movements and their meaning for you as an investor. Market and Meaning is normally reserved for premium subscribers but is currently being offered for free to all our readers. As always, everything here represents my personal views and not official recommendations or advice, please do your own due diligence and come to your own conclusions.

Market and Meaning is broken up into three parts:

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***THERE WILL BE NO MARKET AND MEANING NEXT WEEK DUE TO THE THANKSGIVING HOLIDAY. I HOPE YOU ARE ABLE TO THE ENJOY THIS SPECIAL TIME WITH FAMILY AND FRIENDS.***

PORTFOLIO UPDATES

Big topics of interest for me this week have been oil and Gilead (NASDAQ:GILD). I've mentioned both several times, but GILD has actually been on my stock wish list for several weeks now. What I hope you learn from what may seem like a very slow process is that buying stock should not be an impulse decision. Making impulse decisions usually leads to losing money.

I know it can get annoying hearing Warren Buffett quotes, but the man does have some great quotes and wisdom. I believe he has one where he says he'd rather miss the 10% at the bottom and 10% at the top and "settle" for the 80% in between. The point being that it can be tough to call the exact timing of when to buy and sell. With Buffett, I'd rather potentially miss a little gain by avoiding a potentially bigger loss.

When it comes to GILD, I have not made a move for the two reasons I've mentioned before:

  1. I am already very long stocks and want to maintain a certain cash position until I finally see the correction/pullback that I believe we are long overdue.
  2. I have not gained enough insight into Gilead to give me confidence to buy. This doesn't mean I haven't thought it was a good buy before, just that I hadn't seen enough to confirm a buy for me.

I am now in a situation where #1 is still an issue, but #2 is not.

Analyst's take on Gilead seem to be almost unanimous that the stock is greatly undervalued, currently around $102. I've seen fair value price targets at $140, $149, $150, and $153. That is getting around 40%+ from current levels.

When buying a stock, there are a few key things I like to look at:

  1. Who else is recommending the stock? Is there an analyst I respect who is long?
  2. Do I like the management? Are they clear, honest, and sober-minded?
  3. What is the "story?" What is the compelling future that draws me to the company?
  4. Are the financials sound in terms of debt and cash flow?

As for point #1, Bret Jensen is a strong advocate of the company. Personally, that is all I need there. The fact that there are a chorus of others agreeing with him is merely icing on the cake.

Point #2 can be tough to gauge. Typically, this is where reading the transcript from the earnings call is most enlightening for me. On this point, due to the high level of bullishness on the stock and the overall soundness of the company, I am going to relax on this one. While I have not read the transcripts, I have read analysts who have offered high praise for the management. I am choosing to trust that a company of this size, with it's great financials, and this much bullish sentiment is in pretty good hands.

The compelling story for point #3 has several points:

  • This is a large company (Market Cap of $154 billion) that is trading at around 13 times projected earnings for 2014.
  • EPS have almost quadrupled to $8 in 2014 and the projected earnings for next year are $9.92 showing strong growth expectations.
  • Return on assets (34%) is great as is return on equity (69%).
  • Strong product line-up.
  • Focus areas of HIV/AIDS, hepatitis B and C, as well as serious cardiovascular/metabolic and respiratory conditions offer great growth prospects.
  • The primary story here is that it is a solid company that appears to be very undervalued.

As for #4 and the financials, current liabilities are $6.3 billion and total liabilities are $10.75 billion. These are not bad numbers when considering cash flow. Net operating cash flow is $3.1 billion and free cash flow is $3.91 billion. In other words, they could pay off all their debts in short order if needed, which means debt is not a concern.

Also, the net operating cash flow numbers have been consistently within a range of $2.8 billion and $3.6 billion over the last five years. During that same time, debt has increased at high levels year-over-year. Current liabilities have grown from $1.87 billion to $6.33 billion from 2009 to 2013 and total liabilities from $3.9 billion to 10.75 billion in the same time frame. This does represent a high level of growth in debt, but with solid cash flows, the numbers are still seem very manageable.

Add to this the high rates on return on assets (34%) and return on equity (69%) already mentioned, the numbers look pretty good on GILD.

In the end, while I have yet to buy Gilead due to my current portfolio set-up and concerns over greater market volatility, Gilead remains high on my wish list and believe that it offers a very sound investment opportunity at current levels.

One of my main goals in this update is to help give you a feel for what my decision making process looks like. I look forward to any questions you may have.

A few other noteworthy articles:

If you are interested in trying to make some near-term gains off of the possibility of another cold winter, Bret Jensen has some trade ideas for you.

My portfolio remains 70% long and 30% cash.

I wanted to spend more time discussing opportunities in oil this week, but will have to save it for next time. Until then, enjoy some pieces I've found helpful: Oil as the opportunity of the decade and "Cures" to help the oil market.

Have a great Thanksgiving!

- Brian

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Current Market Outlook: YELLOW

I don't think I'll be able to raise the yellow flag until we get a 10% pullback or greater. Once that happens, a tremendous amount of tension will be released from the markets.

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Disclosure: I have no positions.

Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. All readers must be responsible for and make their own investing decisions. Each reader bears the full responsibility for any decision to buy, sell, or hold any securities, precious metals, real estate, or other asset class as well as any decision regarding the starting or running of a business. Nothing in this newsletter is to be considered a formal recommendation. Investor in the Family LLC makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Investor in the Family LLC will be met. Investor in the Family LLC may receive payment for promoting some products found in this article. Even so, Investor in the Family LLC aims to promote products that it has tested and believes will add value to readers. Please see full Disclaimer.

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