Over the past few months I have started to analyze GILD more, and I have become more familiar with how the stock acts, and also its fundamentals. GILD is trading at a forward P/E of 11 and is projected to have earnings growth upwards of 30% over the next 3-5 years. When I see a stock that has both an amazingly low P/E and also a phenomenal growth rate (4 times the estimated S&P 500 growth rate) I know it is a good long-term buy. However, it is also important to look at the technicals to see if the stock has more room to the upside.
The technical indicators will not become bullish until GILD starts rallying. The MACD will stay negative and the +DI will stay below the -DI until GILD gets back above 110 on strong volume. The bad thing for GILD is that it is having a correction while the SPY has not; this means that GILD will have to play catch-up in a big way. This may mean that GILD will not rally until the beginning of 2015. The stock is already up big for the year and this 3-month consolidation is nothing but healthy for a stock that has run-up so much. From a long-term perspective the techincals are very bullish. The 200dma is slowly coming up to the current stock price, which will make the downside risk less, while the 50dma is showing signs of solid support. I think that the only thing that will cause GILD to fall significantly will be a change in the fundamental picture. But, as of now, that seems unlikely considering it just came out with a better than expected earning report and continues to make progress with its major drugs.
Most analysts and big institutions remain very bullish on GILD. Most analysts have price targets that are 10-20% higher. Over the last few months we have seen a very strong presence for the “buy-the-dip” crowd. Any significant dip has been bought, like the one in October. The volume has also been quite impressive, both on the upside and the downside. However, in this market environment we tend to see most stocks experience high volume on the way down and low volume on the way up. For most stocks this means a lack of conviction for upside. Yet, the fact that GILD has a lot of volume as it rallies is a sign that big traders and institutions like the name, a lot.
How am I playing GILD? When GILD was around $107 I bought the January 2016 $105 calls. I am not trying to make a multi-bagger here, but simply trying to leverage my gains to the upside. I also intend on selling weekly calls against my long January calls to lower my cost. Going based on past history, GILD tends to see huge rallies after long periods of consolidation. I believe that we could be in for another $20-$30 run in the coming months. To put that in perspective, from the October low to the October high, GILD rallied over $25, in just under 3 weeks. Right now it sits over $10 off the higher, so it could easily snap-back $10-$15, then some. There has been a lot of option activity in the 115 and 120 calls expiring in February and May. This is a sign that there is ‘big’ money playing for a dramatic rally over the coming months. For many traders, buying the OTM strikes seems like a good bet because the profits can be much larger (percentage wise). To me, I think that buying ATM is fine, so therefore you do not sit there worrying about time decay everyday and do not NEED a 20-30% move to just break-even come expiration. By buying the ATM calls, all I need is for GILD to be back at its end of October high sometime between now and January 2016. Lastly, for those that think it is smarter to just buy the stock than buy options that cost you over $2,000 per contract, I like to think about it like this. If you were to aim to sell $.25 in premium every-week (Next week’s $8 OTM call goes for $.25, so it is a pretty safe bet to sell this call and expect to collect the premium), by the time expiration comes along, you would have been able to pay off more than 2/3 of the cost, meaning that your risk/reward would increase dramatically by January 2016.