Gilead Sciences, Inc. (NASDAQ:GILD) Board member Per Wold-Olsen has bought 20,000 shares of the company’s stock in the past couple weeks, according to two Form 4s filed with the SEC. Half of the shares were purchased at prices of about $33 and the rest were purchased at prices of about $34. This makes the total buy quite large in dollar terms; recently we have been focusing on the most recent set of 13F filings and our corresponding work on hedge fund investment strategies (for example, we have found that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year), but the size of this purchase makes it worthy of investors’ attention. Economic theory predicts that insiders should be hesitant to increase their company-specific risk by buying more shares and instead prefer to diversify- unless they are quite confident in the stock’s prospects. As it turns out stocks bought by insiders tend to have a small outperformance effect (read our analysis of studies on insider trading).
Gilead is a biotechnology company whose current market capitalization is about $67 billion. The stock has risen 88% in the last year, with a fairly steady increase in price, and has more than doubled in the last two years. Last quarter Gilead’s revenue and earnings each increased at a double-digit rate compared to the fourth quarter of 2011. Because the appreciation of the stock has outpaced growth, the trailing P/E has risen to 27. We think that the company would have to sustain its current growth rates- specifically, y/y earnings growth last quarter was 15%- for several years or see an even larger improvement on the bottom line in order to prove a good value. Analyst expectations are for a forward P/E of 16, much better value territory, and a five-year PEG ratio of 1.
Tiger Cub John Griffin’s Blue Ridge Capital was the largest hedge fund holder of the stock out of all the funds we track in our database of 13F filings; Blue Ridge reported a position of 4 million shares (see Griffin’s stock picks). Adage Capital Management, which is managed by Phil Gross and Robert Atchinson, increased its stake by 25% between October and December and closed the fourth quarter with about 3 million shares (find Adage’s favorite stocks). Partner Fund Management was also buying the stock, and had 3.9 million shares of Gilead at the beginning of January making it the fund’s top stock pick. Partner Fund Management is managed by Christopher Medlock James.