Is Gilead (GILD) Overvalued or Undervalued?
A Long-Term Market Top
One Great Mass Market Investment
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Is Gilead (GILD) Overvalued or Undervalued?
The following email arrived in my inbox yesterday:
Timothy, Goldman Sachs ranks GILD as one of the 9 most overpriced stocks. But on the other hand Roy has selected this stock as one of his Value stocks. What do you think about it?
Best,
- Larry J. (Cabot Benjamin Graham Value Investor subscriber) Palm Coast, Florida
I answered Larry, telling him the answer to his question would be interesting to all my readers. So here goes:
My short answer is this. Difference of opinion is what makes the market work, and looking for a third opinion (mine) on the question of Gilead Sciences (GILD) risks muddying the waters further.
Ideally, you pick one advisor you trust—Goldman, Roy or me—and then do what we say, tuning out all other opinions.
But I know that’s not realistic. In fact, I personally find great value in seeking out opposing opinions (on any matter, not just investing), so I don’t go too far down any wrong path.
So here’s my take on Gilead:
The stock has soared from under 20 to over 120 over the past four years, thanks to mushrooming revenues from Sovaldi and Harvoni, the company’s hepatitis C drugs that can cost as much as $1,000 a day in the U.S. In the first quarter of this year, revenues grew 52% from last year—and that was the slowest revenue growth rate in five quarters!
But the stock is very well known, and some analysts (Goldman Sachs apparently among them) are worried that falling prices and competition will cut into the company’s fat profit margins (61% in the first quarter).
Still, the stock looks good!
After a five-month correction/consolidation from November of last year through March, GILD found support at its 50-week moving average around 100, and the renewed energy from the advance that followed took the stock out to new highs.
And what do I conclude when I see a stock hitting new highs?
That the consensus of all investors with skin in the game is that this company’s prospects are increasingly bright!
The combination of rapid growth, market leadership (including some sort of moat) and a strong chart is a winner for me, regardless of valuation (which you’ll notice I didn’t even mention).
In short, I like GILD.
And I respect the fact that Roy Ward, our in-house value guru and Chief Analyst of Cabot Benjamin Graham Value Investor, likes it, too.
But it’s worth pointing out that GILD isn’t a typical value stock for Roy—it’s one of his Cabot Enterprising Model stocks, which are intended to diversify your value portfolio. With his Cabot Value Model stocks—slow growers like Colgate-Palmolive, for example, or Consolidated Edison—Roy follows a strict value discipline, buying only when a stock trades below his Maximum Buy Price.
Gilead, being a fast-growing (though huge) medical tech company, gets the nod from Roy because of its price-to-earnings-growth (PEG) ratio, a metric that, unlike the more commonly-used PE ratio, factors in a company’s earnings growth rate.
Back in October, when Roy initially recommended it, and the stock was selling at 104, here’s what he wrote.
“I forecast sales and EPS to surge another 30% during the next 12 months ending 9/30/15. GILD shares sell at 17.5 current EPS and only 13.3 times my EPS forecast of $7.80 for the 12-month period ending 9/30/15.
Gilead does not pay a dividend, but cash flow is $10.1 billion per year, and the balance sheet is strong with only $9.8 billion of total debt. The PEG ratio is 0.65, which is very attractive. I expect GILD to reach my Min Sell Price of 156.79 within one year. Buy at the current price.”
Since then, GILD is up 13%. So that’s a good start. And since then, it’s begun paying a dividend yielding 1.6%.
Now, does all this discussion help Larry? Does it help you? I hope so. But my original point is worth repeating.
You can’t serve multiple masters.
If you really want to be a value-oriented investor, find one advisor you trust and follow his advice. If it’s Roy, who has a terrific track record (+253% vs. the Dow’s 98% since 2002), you can start here. (Note: his Minimum Sell Price on GILD has changed since October.)
Alternatively, if you don’t want to limit yourself to any one investing system, you can follow the advice I give to my Cabot Stock of the Month readers, which is drawn from a multitude of Cabot advisories. (Note: I have not recommended GILD to my readers—yet.).
Lastly, if you want to lean the other way and totally ignore value, you should consider Cabot Top Ten Trader, which has recommended GILD 13 times over the past four years, most recently in June! Click here now.
Bottom line: there are many ways to invest successfully, and Cabot can help you with most of them.
A Long-Term Market Top
Moving on to the market, here’s what I see.
Market breadth is narrowing as divergences grow, with natural resource stocks and interest-rate sensitive stocks leading the way on the downside, while large-cap growth stocks like GOOGL, FB, NFLX and GILD break out to new highs and take an increasingly large share of the action.
To me, it’s classic long-term market topping action, which is likely to last at least a few more months, not least because individual investors are fairly apathetic about the market.
So your best course today is to follow the money.
Find a large-cap growth stock that’s hit new highs recently and buy on a modest correction. And if you share my biases, find one with great growth prospects.
One Great Mass Market Investment
One stock that fills the bill is Ulta Beauty (ULTA), a company whose fast-growing chain of beauty supply stores (with salons included) will eventually blanket the country, if not the world. Today there are 797 stores; 24 were added in the first quarter, ended May 2.
It’s a classic mass market cookie-cutter story, no different than McDonalds or Coach or Walmart. Find a successful store formula and then repeat it, again and again and again.
For Ulta, this repetition has brought steady earnings growth; over the past three years earnings have grown 25%, 20% and 38%, and analysts are projecting that earnings will continue to grow at a similar rate.
So growth is very predictable.
Plus, the company has no debt.
Plus, it also sells online.
Plus, it’s buying back shares.
And its stock recently broke out to new highs!
So, you could simply jump into ULTA somewhere around here—perhaps on the next normal correction—and hope for the best.
But a wiser course would be to become a regular reader of Cabot Growth Investor, whose readers were advised to buy the stock back in November, when it was trading at 121, and get Mike Cintolo’s latest opinion on the stock.
For details, click here.
Yours in pursuit of wisdom and wealth,
Timothy Lutts,
Chief Analyst, Cabot Stock of the Month
Publisher, Cabot Wealth Advisory
