(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Gilead Sciences Inc. (GILD) stock may be finally starting to show a revival after three years of sharp declines, dragging the stock down by over 30%. But the past year has been a different story with the stock now up over 10%, and signs have emerged more gains are to come over the short term. A technical analysis of the charts suggests the stock may be due to rise by about 7%. Should that happen, the stock would be up well over 28% from its recent lows in mid-May around $64.
Options traders are betting the rally in Gilead will continue as well, and they see the stock rising to about $82 by the middle of August. The longer-term outlook for Gilead still proves to be questionable with the company still facing declining revenues as it rebuilds its drug pipeline. The company has seen a meaningful decline in sales for it hepatitis C treatment on increasing levels of competition.
Gilead stock has cleared some formidable technical resistance levels on its march higher in recent weeks. Now with the most recent level of technical resistance out of the way, at $76.53, shares have room to rise to the next resistance level at $82.60, an increase of about 7% from the stock’s current price of approximately $76.25.
The relative strength has been trending higher in recent weeks suggesting bullish momentum is moving back into the stock. Volume levels have also been increasing in past days, above the three-month moving average, indicating buyers are moving into the rising stock price.
Options traders are also betting shares of Gilead will rise by expiration on Aug. 17 as well. The $77.5 strike price calls have an open interest of about 17,000 contracts versus approximately 500 puts. With the calls trading at a price of $2.75 per contract, the stock would need to rise to $80.25 to break even if the options are held until expiration. Meanwhile, the $80 strike price options have an open interest of roughly 4,000 call contracts and trade at $1.70, suggesting a breakeven price of $81.70, a rise of about 6%.
The bigger question for Gilead will be how it will turn revenue and earnings growth around. Revenue is forecast to fall by over 20% this year, while earnings are expected to decline over 30%, based on analysts’ estimates. However, even worse, revenue is seen only rising by 1.5% in 2019, while earnings are forecast to increase by about 5%.
With growth hard to find in Gilead's story, a short-term rise is undoubtedly welcome, but the company will need to do more to trigger a longer-term increase in its stock price.
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.