It’s that time when the rubber meets the technical road for biotech giant Gilead Sciences, Inc. (GILD) and GILD stock.
For bulls looking to buy a wide-moat company at a hefty discount, GILD stock offers that too, as well as a limited risk vertical that looks well-suited for the occasion.
“Undervalued, quality management, strong cash position and product pipeline.” It doesn’t get any better than that in GILD stock — or does it?
Considering not much has changed to the underlying business at Gilead Sciences since that article was written, GILD stock is looking even more attractive.
With shares down 14% since Dec. 29, GILD stock now trades at an even lower, below-market multiple of 8 and forward price-earnings of 7.35. In fact, according to analysts at Kiplinger, GILD stock is “remarkably cheap for a biotechnology leader.”
So, what gives in GILD stock? Investors are concerned over slightly weaker sales and increased competition within Gilead’s revenue linchpin, the hepatitis C market, as well as fears the company’s pipeline may not fill the sales void.
Investors focused on bear market headlines are also doing a good deal of overlooking any positives for GILD stock.
A new and looser hepatitis C approval by insurer UnitedHealth Group (UNH) and possible new hepatitis C combination, which could be approved in June by the Food and Drug Administration, are certainly being downplayed right now.
Having said that, Gilead Sciences can actually afford lackluster earnings growth and still allow nice upside with just a bit of multiple normalization, removing itself from the extreme risk-off theme so popular today.
GILD Stock Weekly Chart
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The detailed neckline also shows the earmarks of acting as a supportive triple-bottom pattern. And that could be very bullish as bears rush to cover if GILD stock holds and begins to reverse higher.
All told, it is a situation where the rubber meets the road in GILD stock.
Given the market’s extreme pessimism and GILD’s underlying fundamentals, I see the advantage favoring bulls at this time, but I’d also rather not fall victim to any value traps on either level.
How to Trade GILD Stock
Reviewing the GILD stock options board, the Feb $92.50/$95 bull call spread for 85 cents or less is attractive.
This bullish spread allows for a return of nearly 200% in less than a one month holding period while containing risk to less than 1% of GILD stock based on 100 shares and an equivalent 1 contract spread position.
This vertical in GILD stock is also attractive as it cuts down time decay and volatility risks associated with a straight long call purchase, which requires a move of 7% and above $95 in GILD stock by expiration to realize the max profit of $1.65 based on the 85 cent purchase price.
Bottom line, getting above $95 could be somewhat optimistic. But given earnings as a potential catalyst in early February, and the described protection afforded by the vertical, GILD stock could turn into a bona fide value trap.
The vertical makes a great deal of sense with “little cents” needed to play as a bull at the same time.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT
