With nothing more than a quick view of its chart and a passing glance at the headlines, it would be easy to decide Gilead Sciences, Inc. (NASDAQ:GILD) is best left avoided. The GILD stock price took a fairly big tumble after the release of its third-quarter results after Thursday’s close, extending the short-term pullback started a few days prior.
But, this is one of those uncommon scenarios where it has paid to do the opposite of what intuitively feels right. Gilead Sciences could actually be a very good buy here, expressly because it seems like it shouldn’t be.
Don’t laugh … at least not until you’ve read through the reasoning.
GILD: Time to Trade the Pattern
In a perfect world, investors would respond rationally to news, making minor — and major — adjustments to a stock’s price as the risk/reward scenario for a stock seems to change. We don’t live, or trade, in a perfect world though. When their money is on the line, humans can rationalize some rather wild things. More than that, however, they can and do change their mind with no warnings whatsoever.
Had GILD stock not had a history of indecision and reversals (in both directions), the premise may not even be worth bringing up now. However, it has a history of doing the unexpected, zigging right when it looks like a zag is underway.
The daily GILD stock chart below illustrates this idea pretty plainly. Breakout thrusts have seen little follow-through since June, but ditto for breakdowns. Reversals are the norm, and all of them took shape shortly after the stochastic indicator moved into overbought or oversold territory.
It’s not just the fact that the GILD stock price today is stochastically oversold, however. The pattern Gilead shares have formed is also a key bullish clue.
Namely, between the gap left behind between Thursday’s low and Friday’s high [most gaps eventually get filled] and the hammer-shape of today’s bar this far, the pivot from a net-selling to a net-buying environment may already be in the works.
That is to say, the last of the would-be sellers were flushed out early Friday. The return back toward the high and Friday’s open suggests all the potential buyers on the sideline are finally seeing more reward than risk, taking the plunge.
Reality Check for GILD Stock
For what it’s worth (which isn’t much), Gilead topped last quarter’s revenue outlook, doing $6.51 billion worth of business versus expectations of only $6.33 billion. Earnings of $2.27-per-share topped outlooks for only $2.03-per-share.
While sales were off a little more than 13% thanks to a waning hepatitis C drug business, investors more or less knew that was in the cards. Still, there’s just something about seeing it in print that can spook a stock. It’s the company’s deteriorating hepatitis C sales, in fact, that keep GILD moving all over the map.
The core question that’s driving traders mad: does GILD stock’s current price reflect the company’s struggling hepatitis C portfolio. Some feel the answer is yes, while others feel the answer is no. Many of those traders, however, don’t know, and/or they’re changing their mind on a pretty regular basis, hence all the volatility. See, the company’s hepatitis treatments Sovaldi, Harvoni, Epclusa and Vosevi are perceived as Gilead Sciences’ flagship products. If they’re doing well, so is Gilead. If they’re doing poorly, again, so is Gilead.
It’s a misnomer that’s too easily forgotten though. Through its recent acquisition of Kite Pharma, Gilead is now wading deeper into oncology waters, and Gilead is still a major HIV player. As traders remember what else it has got in the pipeline and in its portfolio, the stock somehow has a habit of swinging in a bullish direction again.
It’s an intricate psychological dance that’s ignored at your own peril.
Bottom Line on Gilead Stock
Be that as it may, even against the backdrop of lowered 2018 guidance and regardless of the current shape of the GILD stock chart, there’s another reason Gilead Sciences shares are more of a buy than a sell here. As RBC analyst Brian Abrahams noted, “Even without explicit 2018 guidance, we believe this directionally should help bring down Street hepatitis C numbers for next year, a welcome reduction that would lessen an overhang on shares.”
Not only is Abrahams right, he’s indirectly underscoring the overarching premise and problem here … GILD stock has been hijacked by perceptions and relativity. With the relatively bad news having almost run its course, look for the glass-half-full crowd to reinflate the stock again as they have several times in recent weeks.
The rules of the game with GILD may not qualify as ‘investing,’ but they’re still the rules of the game for this contentious, often confusing stock.
As of this writing, James Brumley held a long position in Gilead. You can follow him on Twitter.
