Emotions are running wild this week in the investment community. The stock markets have been on a seesaw, down 4% on Wednesday and up 4% by Thursday afternoon. This morning we have a nasty reversal on the back of Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL) earnings reactions. So trading stocks these days is hazardous to your portfolio in the short run. In the long run, there are opportunities and today I consider Gilead (NASDAQ:GILD).
The macroeconomic conditions still favor the bullish thesis. However, we have short-term headlines that are stifling sentiments. Wall Street fears that the Federal Reserve will overshoot with their rate hike cycle.
Even though they have been consistent in their actions, the new Federal Reserve Board Chair Jerome Powell has not clearly stated that he is data dependent. Investors need to see a continuation of that clear statement from Janet Yellen’s era.
My thesis is that he is indeed watching the data just refuses to say it. Perhaps this is his way to deal with the pressure that he is getting from President Trump on the subject. The company P&L’s show strength and the balance sheets support it.
Last night GILD reported earnings and the stock is down 4% in spite of delivering a decent report. It is unlucky to report on the same day as GOOGL and AMZN and during a generally tough tape. So it’s caught up in that wave of selling this morning. Traders are shooting everything in fear of a deeper correction.
GILD management actually beat revenues and earnings expectations. More importantly, they increased their guidance for the full year 2018. I am a fundamental investor so I usually look for value in a proven stock. Gilead at these levels looks like a broken stock but not a broken company.
The stock has recently shed a lot of froth since the January spike as it’s down 25% since then. Year-to-date it’s down 7% coming into the earnings which is about mid-range of its competition. Celgene (NASDAQ:CELG) for example is down 30% whereas Amgen (NASDAQ:AMGN) is up 7% for the same period.
Fundamentally, Gilead is cheap relative to its competitors from a price-to-earnings perspective. The sector, in general, is selling at a low P/Es but Gilead is at the lower end of that scale with 11. I am confident that owning the shares for the long term are not likely to be a financial debacle.
So it comes down to the technicals. I don’t believe I’m an expert in the fundamentals of Biotech companies. They tend to be headline driven and the stocks move in bursts. I have been lucky with GILD catching its breakout from the long descending wedge that started in 2015. Now I want to trying and catch this falling knife as it approaches the same support zone.
Gilead is once again falling into the same support on the monthly chart. It has set lower highs testing this floorboard which so far has been strong and that’s the good news. But the risk now becomes that if it gives way, it might open a trapdoor to test $55 per share. While this is not a forecast, it is a possible scenario I need to consider.
Given the risks that still are in the environment, I would start small and build up as I gain confidence that the markets, in general, are not going to correct much further from here. The results from Amazon and Alphabet last night are putting selling pressure for the entire equity markets. Caution and tight stops are more than warranted in this case.
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.