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.
We can compare Gilead to GlaxoSmithKline plc (NYSE:GSK), Pfizer Inc. (NYSE:PFE), Abbott Laboratories (NYSE:ABT), and Bristol-Myers Squibb Co. (NYSE:BMY). The trailing earnings multiples at these peers are generally at 15 or lower, which make for considerable discounts to where Gilead trades. The exception is Bristol-Myers Squibb, which trades at 32 times trailing earnings. On a forward basis analysts expect it to grow a bit more quickly than Gilead, pulling the two stocks roughly even in terms of forward earnings multiples. We’d also note that earnings growth is expected to be lower at the other companies- and even negative at Abbott- so in terms of 2014 the valuation range narrows considerably (though of course that is dependent on Gilead hitting its earnings targets for the next couple years). Abbott is the only one of these four peers to report an increase in revenue in its most recent quarter compared to the same period in the previous year, and even there net income was down over 30%.
Certainly Gilead has an advantage over these other companies in that its business is stable, let alone growing nicely. The valuation is high, and certainly does depend on continued earnings growth at least at a similar level to what the company has been doing, and so even with the large insider purchase we would be hesitant to buy here. Perhaps it might be wise to look for specific drugs that should drive earnings growth or come back to the stock after the next quarterly report.
Disclosure: I own no shares of any stocks mentioned in this article.