Once in a while an interesting stock appears when an investor writes in. The most recent question came from an investor interested in Gilead Sciences Stock which trades under the symbol GILD on the NASDAQ. Gilead Sciencesis a research-based biopharmaceutical company that discovers, develops and commercializes medicines with a primary focus on human immunodeficiency virus (HIV)/AIDS, liver diseases, such as hepatitis B and C and cardiovascular/metabolic and respiratory conditions. They operate in North America, Europe and Asia Pacific with sales of $11.2 billion. They are not the largest corporation in the biopharmaceutical industry, but they are growing although I prefer Amgen. An investor wrote in recently wondering about the stock as he was assigned shares at $81.00. Let’s take a look.

Investor Question

Can you take a peek at this stock and let me know what you think. They make a hepatitis drug that got approved Dec 2013. Can you see if it is overvalued? I made decent money on it so far doing covered calls. I got assigned at $81. My plan is to sell weekly calls on it. Premiums are good. I will sell covered calls until the stock recovers in price.

Over or Undervalued?

Gilead stock trades at a multiple of 42.1 times price to earnings and 34.6 times cash flow. It pays no dividend and has a profit margin of 27.29%. Amgen which is possibly a more mature company trades at 19.1 times price to earnings and just 15 times cash flow. Amgen (AMGN) made 18.7 billion and has a profit margin of 27.21% and it pays a dividend of $2.44.  A company with similar stats to Gilead is Biogen. Biogen (BIIB) trades at 44.8 times price to earning and 27.11 times cash flow. It pays no dividend and has a profit margin of 27.11%.

You can see that all three companies have similar profit margins and the two more speculative trades, Gilead and Biogen trades at similar stats. You can see why I prefer Amgen. The stats are stronger, it pays a dividend and it has a very nice trading pattern for my type of investing, namely selling puts. It also lends itself well to put credit spreads which many investors prefer.

In a context of other stocks in its industry and that are speculative, Gilead Stock is not overvalued but also not undervalued. I would classify it as fully valued at the $75.00 level where it trades today. Therefore the investor who wrote me is in the stock perhaps 7% too high. That said, I would prefer to be in this stock at the $70 level instead. Being in the stock at a slightly lower level would mean I am in the stock not really at an undervalued level but at a fair valued level.

Gilead Sciences Stock September 2013 to March 2014

If we look at the stock chart below we can see that based on volume and price there is support in the stock primarily at $75, where it is trading now and $70. Major support though it down at $60 which means in a major sell-off the stock will probably swiftly take out the $75, and $70 levels.

MACD indicates that the stock is still heading lower and indeed today (March 20 2014) the stock is down $1.28. It has recently broken its longer-term uptrend and at $75.00 investors are trying to decide probably the same question as the investor who wrote me, namely is GILD Stock under or overvalued.

Momentum is definitely moving lower and if the stock breaks $75 that will conclude the latest uptrend for the stock so I would expect it to establish a new trading pattern between $$70 to $75.

The Ultimate Oscillator shows the stock as oversold and due for a possible bounce while the Slow Stochastic agrees and indicates a buy signal intraday day today which would have to be checked after the close and then confirmed by a push higher tomorrow.

Gild Stock chart as of March 20 2014

Simple Strategy Ideas

Since the investor who wrote me is comfortable holding the stock at $81, I would suggest some simple strategy ideas. The first would be to average lower into the stock by selling puts down at the $70.00. The May $70 strike is selling for $2.17 or more than 3% for two months. I do not know how many shares this investor is holding but let’s say in theory it would be 300 shares. If this was my positions I would sell 2 put contracts at the $70 put strike for May 17 options expiry. This would place my puts deep below support at $75 and probably right at the very bottom of any short-term move lower should the stock break support at $75. In other words, if GILD stock falls below $75 it will probably quickly fall to $70. By mid-April or May if the stock is down to $70, I would then roll out these puts to the same strike – $70, but into July or August for more premium..

Next I would today sell the August 16 expiry $65 naked puts for $2.80. I would sell 4 put contracts and probably use margin on these if any was available. This is a return of 4.3% to August. If GILD Stock falls then all the way to below $65 by August I would accept shares assigned at $70 and $65 which would reduce the $81 shares to $71.44. The actual cost basis would be a lot lower due to the income earned, but I think readers should get the idea.

Meanwhile the investor can keep selling covered calls at his present strike and then if $75 breaks I would roll the covered calls down to $75.00 simply because I believe if $75 breaks the stock will set up a new trading pattern lower. If assigned on 900 shares eventually by August, the average cost of $71.44 would mean this investor is in the stock just above the $65 light support level. The chance of being taken out in a spike higher come the fall of this year would be quite good and he could then decide to either roll covered calls forward and stay around the $70 strike level or repeat the above process at lower strikes and continue to average himself lower into the cost.

Final Word on GILD Stock Question

This stock is definitely not going to disappear. It has strong earnings, continues to grow and management seems aggressively pursuing acquisitions to continue that growth. This means as an investor you would want to establish a clear goal as to what you hope to achieve through trading this stock. If the goal is to grow with the stock then you would keep rolling all the positions forward as long as possible and continue to add more capital in coming quarters. If the goal was to great as much growth out of the stock as possible then you would trade it more aggressively by selling additional puts at lower strikes to keep reducing the cost of the stock at the $81 level, but you would shorten the time period from August into perhaps May.

There are a lot more strategies that can be applied to this position and that is beyond the scope of this article. But as you can see, this investor can continue to earn profits in a company that has a good outlook for the future. They key aspect is establishing the goal of the entire trade, the reason for trading GILD Stock and then selecting the strategies to best meet those objectives. A lot of the strategies in the members forum would meet all those objectives. Thanks for the question.

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