Gilead offers big potential for risk-tolerant investors

Imagine a drug that doesn’t just treat a terrible disease, but cures it in most patients. That’s hepatitis C drug Sovaldi. The stock of its maker, Gilead Sciences (Nasdaq: GILD), has been surging.

Gilead is a Goliath in HIV treatment, with five different medicines that could hit billion-dollar blockbuster status this year. Its Atripla and Truvada are top drugs prescribed for HIV in the U.S., and Gilead’s HIV drug sales totaled more than $9 billion last year. It has an approved cancer drug, too – Zydelig, tackling chronic lymphocytic leukemia and indolent non-Hodgkin’s lymphoma.

The company’s multibillion-dollar hepatitis-C drug franchise is fattening up Gilead’s balance sheet. Since December, Gilead’s cash hoard has jumped from a bit over $2.5 billion to more than $9.5 billion exiting the second quarter. That’s largely due to Sovaldi, which costs $84,000 for a 12-week course of treatment and generated more than $5 billion in the first half of 2014.

Biotechnology stocks are not for the faint-hearted. They can be volatile, as their fortunes are tied to drugs whose patent protections expire over time, and to drugs in lengthy development processes that don’t always end up approved for sale. Still, risk-tolerant investors should consider Gilead. It’s huge and growing well, and with a recent P/E ratio in the mid-20s, it’s appealingly priced. (The Motley Fool has recommended shares of Gilead and owns shares of it.)

Ask the Fool

Q: I’m invested in a bunch of mutual funds. Should I invest in some individual stocks, too, for additional diversification? – L.L., Naples, Florida

A: Diversification is important in a portfolio. If you have too much of your assets in one holding or sector, you can get hurt badly. Some mutual funds alone can provide sufficient diversification, as they’re invested in several hundred different securities. (Note that many mutual funds are very similar to each other, offering more duplication than diversification.)

The main advantage of adding individual stocks is to possibly boost your portfolio’s performance. If a stock holding appreciates in value, it can make a significant difference in your portfolio.

You need to know what you’re doing when you select stocks to buy, though. You can learn more at fool.com/how-to-invest and investopedia.com. If you don’t have the time or interest, consider just sticking with low-cost broad-market index funds that automatically mirror the stock market’s performance.

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My smartest investment

Many years ago, I bought 1,000 shares of a small oil company because its stock-price graph had an unusual “sawtooth” shape. Contrary to the adage of “buy and hold,” I’ve sold increments of the shares over the years and have more than tripled my money. I haven’t found a stock with a similar wave shape since. – J.S., Homer, Illinois

The Fool responds: You were engaging in “technical analysis” there, which most of us at Fool headquarters avoid, as it’s focused mainly on stock-price movements instead of the health and prospects of the underlying company. We prefer “fundamental analysis,” which examines growth rates, competitive advantages, financial health, management candor and skill, and so on. You may not have found another similar wave shape, but there have been gobs of great investments over the years, available for those who read up and do some research.

Meanwhile, we do prefer to buy and hold, as long as a stock seems healthy and growing and isn’t very overvalued. That doesn’t mean we won’t sell if we need some cash, or want to buy an even more compelling long-term investment.