Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Gilead Sciences, Inc. (GILD), Celgene Corporation (CELG): Thursday’s Top Upgrades (and Downgrades)

Gilead Sciences
Argus is switching from a “hold” to a “buy” rating on Gilead Sciences, Inc. (NASDAQ:GILD), and this is a recommendation I agree with. Gilead Sciences, Inc. (NASDAQ:GILD) recently received Food and Drug Administration priority review status for its new sofosbuvir drug for the treatment of hepatitis C. It’s put out positive news of test results of a drug to cut the risk of HIV transmission even more recently than that.

“Headline” momentum is clearly on the stock’s side, and even better, the valuation looks right. Gilead Sciences, Inc. (NASDAQ:GILD) shares cost 29 times earnings right now, and are even cheaper when valued on the company’s free cash flow. Earnings growth over the next five years is expected to approximate 26% — perhaps even more, given the recent positive news developments.

I think that, worst case, the stock’s fairly priced at these valuations. Whether  it’s a “buy,” though, really depends on how much the latest news can move the needle on earnings growth.

Argus also shifted its stance on Celgene Corporation (NASDAQ:CELG) from “hold” to “buy.” Here, the analyst also produced a price target of $140 on the stock, which currently costs about $120 a share.

But here’s the thing: At 36.5 times earnings Celgene Corporation (NASDAQ:CELG) costs even more than Gilead Sciences, Inc. (NASDAQ:GILD), while at a 22% projected growth rate, it seems to be growing slower than Gilead. If you’re counting along at home, that’s two big strikes against the stock.

On the other hand, Celgene Corporation (NASDAQ:CELG) does generate a lot of cash. At $1.9 billion generated over the past year, it’s actually about 34% more profitable than its “GAAP” earnings figure makes it look — and it’s also carrying less debt than Gilead is.

All that being said, 26 times free cash flow (which is what $1.9 billion in FCF on a $50 billion market cap works out to) still seems a bit much to pay for a projected 22% grower. While Celgene Corporation (NASDAQ:CELG) has some positive news developments of its own to boast about, I’m probably even more skeptical of this stock’s valuation than I am of Gilead’s.

Long story short, I’d hold off on buying either one of Argus’s biotech picks today and wait for better prices. The one thing I’m sure of about today’s ratings, though, is Sterne’s warning about DreamWorks. That one definitely looks too pricey to be worth the risk.

The article Thursday’s Top Upgrades (and Downgrades) originally appeared on

Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends Celgene, DreamWorks Animation, and Gilead Sciences.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.