(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Gilead Sciences Inc.'s (GILD) stock has rallied by more than 19% since early May, nearly double the gain of the broader market. Options traders are betting the stock's rebound will continue by rising another 7% through the middle of November from its price of $77.96 on October 1. Technical analysis also supports that view and indicates the stock will continue to advance. (See: Gilead's Hot Stock May Have Further to Rise.)
One reason for the bullish outlook is that analysts have been raising their earnings and revenue estimates since the company last reported results in late July.
A 7% Price
Traders see Gilead’s stock rising through options expiration on November 16. At the $80 strike price, the volume of bullish calls outweighs the bearish puts by about 4 to 1. The number of open calls is almost 10,000 contracts. For a buyer of those calls to earn a profit, the stock would need to rise to at least $82, an increase of 5%.
But some traders are betting the stock will climb by as much as 7%. The $82.5 calls have seen the number of open contracts more than double to almost 17,000 since October 1. For a buyer of those calls to earn a profit, the stock would need to rise to at least $83.50.
Strong Technical Chart
Technical charts suggest the stock has bullish momentum behind it, at least in the short term. The stock has been rising along a bullish uptrend since it bottomed in early May. If the stock can rise above technical resistance at around $78.80, the stock could rise to $82.40, which would be a gain of about 6%. The relative strength index for Gilead has also been trending higher over the same period, suggesting continued bullish momentum. (See: 4 Biotechs on Verge of Big Breakouts.)
The short-term picture for Gilead's fundamentals looks strong. Since the end of July, earnings and revenue estimates have both increased by 3%.
But the longer view is more sobering. Gilead's earnings and revenue are expected to be flat next year compared to 2018. With third-quarter results due in late October, investors will focus on management's guidance for the balance of 2018 and for 2019. Unless the earnings outlook improves longterm, Gilead's rebound s likely to fall flat.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.