The Motley Fool: A Biotech Bargain
The Motley Fool Take
Gilead Sciences is a market leader among biotech companies, with a market value recently topping $100 billion. It has an enormously valuable portfolio of drugs focused on treatments for HIV, hepatitis B and hepatitis C, and has made a series of acquisitions over the last several years that have expanded its presence in areas such as pulmonary and cardiovascular diseases and cancer.
The lion’s share of Gilead’s revenue comes from hepatitis C treatments, but increasing competition from lower-cost drugs is putting pressure on sales there. Sales of HIV products rose 15 percent year over year in the last quarter, though, to $3.1 billion.
Total revenue could remain under pressure in the coming quarters, but Gilead has a promising pipeline of drugs in development. It’s sitting on $24.6 billion in cash, cash equivalents and marketable securities, and it generated almost $17 billion in free cash flow during the 12 months that ended in June. This gives it abundant resources with which to buy smaller players and find new growth opportunities via acquisitions over the coming years.
Gilead is rewarding shareholders via aggressive stock buybacks (which boost the value of remaining shares), and it offers a dividend, too, which recently yielded 2.5 percent. With a single-digit price-to-earnings (P/E) ratio, it’s attractively priced compared to peers and is likely to reward long-term investors.
Ask the Fool
Q: What’s the harm in buying overvalued stocks as long they eventually rise in price? - T.R., Greensburg, Pennsylvania
A: Expectations don’t always pan out. It’s good that you’re focusing on the long term, but overvalued stocks offer no margin of safety. If the companies don’t perform as you think (or hope) they will, then they may not grow as quickly as you expected - or at all.
Imagine Antisocial Networking (ticker: SCRAMM), trading at $25 per share, near its intrinsic value. If it’s expected to grow at 10 percent per year for the next 10 years, it should trade around $65 per share in a decade. If you buy it at $25 per share, the total increase over the decade will be 160 percent.
However, if you have to pay $35 per share for it now, it will return only a total of 86 percent on its way to $65. That’s about 6.4 percent per year. Worse still would be buying it at $45 per share. Sure, you’d make money, but your total gain would be just 44 percent, or roughly 3.7 percent annually. If the company doesn’t perform well and doesn’t reach $65 in a decade, you’ll be even worse off. The price you buy at matters.
Q: What can I read to learn more about Warren Buffett? - S.M., Carson City, Nevada
A: Roger Lowenstein’s “Buffett: The Making of an American Capitalist” (Random House, $19) offers a great introduction, covering his life (so far) and his investment thinking. Alice Schroeder’s long biography, “The Snowball” (Bantam, $22), offers even more details, and “The Essays of Warren Buffett: Lessons for Corporate America” (The Cunningham Group and Carolina Academic Press, $32) features his own words.
My Dumbest Investment
The first time I invested in the stock market was because of a co-worker. He talked about making more than $10,000 in a single day with a penny stock, and showed me his account and evidence of the trade as proof. I got excited, thinking, “Wow, that is better than Vegas!” - so I dumped $5,000 into a brokerage account and invested in some penny stocks.
I made big money for half a day and felt pretty good. But when I logged in the next day, I found that my account was suddenly worth $160. I felt sick to my stomach when I learned that I had been hoodwinked by the classic pump-and-dump scheme. Feeling quite dumb, I stayed away from stocks for years. - C., online
The Fool responds: Ouch. Penny stocks (those trading for about $5 or less per share) are notoriously vulnerable to pump-and-dump schemes because they’re typically smallish companies with relatively few shares trading.
In such a scheme, an opportunist buys shares of a penny stock and then “pumps” it up, hyping it online or perhaps breathlessly promoting it in a newsletter. Naive investors snatch up shares, sending the price up. The opportunist then sells his shares, profiting nicely, and as he “dumps” them, they plunge in value, wiping out the other investors. A good way to protect yourself from this danger is simply to avoid penny stocks altogether.