Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

A Different Perspective On Gilead Sciences (GILD).

|Includes: Gilead Sciences, Inc. (GILD)

Bought some Gilead Sciences (NASDAQ:GILD) last Friday under $83 and after a 5% drop. This probably isn't a buy and hold forever stock for me, this is a place bet. There are a LOT of eyes on Gilead. Their earningsannouncement had over 100 comments within 1/2 a day of being published. There were 35 Seeking Alpha articles written this year about the stock, compared to 2 for Nestle (OTCPK:NSRGY).

Gilead could be a value trap, or it could be a tremendous buy. I believe it is a solid buy. I'll try and address some of the BEAR arguments.

Bear Argument 1. "Yeah the PE ratio is low, FCF yield high...BUT earnings will go down, margins will go down... The future is NOT bright".

One of my favorite investors pointed out that investing in dying but profitable industries can be very lucrative. A certain moat exists for dying industries. Why would somebody want to start a business in a dying industry?

Prices are depressed. Amateur investors have a huge tendency to underrate an investment based on that doomsday that will one day arrive. To illustrate this concept look at the oil market. To the average person who knows little to nothing about oil, it all boils down to one fact, it's non-renewable. One day we will run out so no matter what the price is, it's going up. In this elementary way of thinking, oil could trade at $150, or $300 or $500 per barrel but it's always undervalued to the simple minded oil bull. There are oil bulls, and then there are oil worshipers who treat oil like a religion, no fact or data could change their mind "it's always going up".

Let's look at Tobacco. In 1964 Cigarettes officially became bad for us with the Surgeon General's warning. You can imagine the Tobacco bears in 1964, "It's bad, lawsuits are coming AND people will smoke less, I will invest my hard earned dollars in greener pastures."

Smoking rates did go down. In fact Americans consumed hundreds of billions less cigarettes than they did a half century ago. So this means the Bears were right? Wrong.

A Credit Suisse report last year showed that the Tobacco industry performed better than 15 other industries since 1900. If you invested $1 in the average industry in 1900, you'd have $38,255. If you invested in one of the better performing industries like food, chemicals or electrical equipment you could have ~$700,000. If you invested in Tobacco you'd have $6.3 million.

If you invested $1 in Altria in 1968 you'd have $6,638 at the time of the report due to 20%+ compounding for 50 years. It was the best stock to have and it was in a dying but profitable industry.

Bear argument 2. "But Merck (NYSE:MRK) and Abbie (NYSE:ABBV) will steal market share and destroy margins".

This is an annoying argument for Bulls. Tell me something I don't know, something that's not misleading. Yes, the Zepatier sticker price is $54,600 compared to $94,500 for Harvoni, $84,000 for Sovaldi and $83,000 for Viekira Pak but people don't pay list price! It's simply not an apples to apples comparison. A) Why not compare actual prices paid and B) Harvoni/Sovaldi are incumbents and said to be a better drugs. We aren't talking about substituting name brand paper towels for store brand, we are talking about life saving drugs. Doctors are reluctant to switch to unproven and less effective drugs.

Will Gilead lose some market share? Sure, but the overall market will grow before it shrinks. Will margins go down some? I'd bet they do. But they aren't going to get undercut $54,600 to $94,500 and everybody isn't going to Zepatier. Before we start talking about falling margins, decreating revenues, an estimated 1.5 million Americans aren't even diagnosed yet! You better believe those people are going to want treatment.

Bear argument 3. "Political pressure."

Taxachussets Attorney General Maura Healy got on CNBC last week and warned threatened Gilead with lawsuits. In America a business can be sued for...

Charging lower prices than their competition, opponents call that undercutting competition or dumping.

Charging the same prices as competition, opponents that's called collusion.

Charging higher prices than competition, opponents call that price gauging.

Isn't America wonderful? No mater what prices you charge, you can have an angry socialist that wants to get in between a willing buyer and a willing seller and determine market prices :)

Healy brought up "fairness" and "record profits", the CNBC anchor asked what laws the company broke and she had no answer. Nobody broke any laws, there are now 3 separate companies that offer these drugs, and Gilead's drugs have saved how many lives? Oh and bankrupting states? The states were long on their way to credit downgrades and bankruptcy before Gilead came along. Let public sector union workers get higher pay, better bennies and retire early on full pensions (that are underfunded) but blame the drug company for budget woes!

One of MY personal more successful investments was a large concentrated position in Lorillard (NYSE:LO). I wrote a Seeking Alphaarticle about them in 2009. One of the reasons the stock was undervalued was because Congress passed the Family Smoking Prevention and Tobacco Control Act. Despite excellent fundamentals the stock was severly undervalued due to fears that the Feds would ban all menthol cigarettes and destroy Lorillard's business. They already banned flavored menthol because they determined the fun flavors enticed kids to pick up smoking.

On March 18th 2011 the Tobacco Products Scientific Advisory Committee determined that banning Menthol's would benefit public health BUT they didn't recommend banning or restricting menthol cigarettes because they were no worse than regular cigarettes. Lorillard stock took off.

Investors are used to measuring PE ratios, free cash flow, profit margins, projecting future earnings, not handicapping legal pressure. When the political pressure bear argument disappeared the stock rallied hard. This low beta, high dividend paying cash machine rallied faster than the market and eventually got bought out highly rewarding brave shareholders.

Bear argument 3 "No Catalyst".

Even bears admit Gilead is a good value but argue it could go down further. Sure, anything can go down. It's tough to predict catalysts, if you keep buying undervalued stocks, you will do well over time.

My spider senses went off with the valuation. People know the stock is cheap, it was cheap $20 ago but now some people threw in the towel and are fearful about it "going lower on technicals". Others are backing up the truck. Maybe the stock goes lower, maybe not, a rising tide lifts all boats and a down market makes everything cheaper but to me, psychologically this is what bottoms look like. If it isn't the exact bottom fine, but at worst I think over time you WILL make solid money at these levels.


Gilead is a very hot topic these days and I've read a number of articles and publications about the company. Hat tip to DoctoRX for his outstanding article that lays out the best Bull arguments I've read. Another thing I like about this investment is I feel like the smart money is on the bull side of this trade, some of the weaker arguments I've seen are on the bear side. I'm not saying the bears are bad people, only some of their arguments are ill informed.

I recently purchased Dividend Growth Investments Nestle and Wal-Mart (NYSE:WMT) and plan on holding them indefinitely. I DO like the health care sector long-term to capitalize on aging populations in the developed world. Not sure if Gilead will be a trade or a long-term holding in my portfolio but I'm confident in my purchase.

Disclosure: I am/we are long GILD, NSRGY, WMT, ABBV.