Gilead Sciences: A buy, Sell or Hold?

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Many money managers have made Gilead a top investment pick when interview on some popular business shows. I never buy a stock based solely on the recommendation of a media personality. However, I will put it on my watch list and do some fundamental research and study some chart patterns.

Back in November of 2014, I decided to dollar cost average some Gilead shares using a strangle option strategy. I ended up owning 200 shares at $102.00 and made some nice profits selling covered calls. Unfortunately, the share price has been in free fall since Aug of 2015. See the chart below:

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I managed to reduce my average cost down to $90.50 but Gilead tumbled to a record low on Feb 8th after the company provided guidance for fiscal 2017 revenue, which missed analysts’ expectations. See press release:

The research-based biopharmaceutical company said it expects fiscal 2017 net product sales of $22.5 billion – $24.5 billion, below the Capital IQ consensus estimate of $27.98 billion.

Gilead reported late Tuesday Q4 non-GAAP earnings of $2.70 per share, a dime better than the analyst consensus on Capital IQ. Revenue was $7.32 billion, vs. expectations of $7.16 billion.

HCV product sales, were $3.2 billion for the fourth quarter of 2016, compared to $4.9 billion for the same period in 2015.

Price: $65.93, Change: -$7.20, Percent Change: -9.85

Is Gilead turning into a value trap or a real value investment?

valuetrap-300x250

This stock is cheap with a PE ratio of 6.68 compared to the biotechnology industry average of 34.55. Gilead has a 3.13% dividend yield which is the highest within the industry. It has one of the highest ROEs of all companies in the biotechnology & drug industries. Although, EPS growth at Gilead is declining, it is still above the industry average.

The biggest problem with this stock is the biotech industry is experiencing positive revenue growth as a whole but Gilead has been unable to grow revenues and is losing market share. This negative trend has been continuing from the previous year when revenue growth at Gilead was -13.94% while the biotech industry was up some 202.65%.

I hate throwing good money after bad in the hopes of breaking even. So I am not big on averaging down on a losing position. I have been fighting a losing battle on this stock for quite a long time. However, I am anticipating a dead cat bounce off the bottom if some deep value or dividend investors decide to buy. I think that I should take a lost and buy something else. What do you think?

Do you own Gilead, are you going to average down, sell for a lost or are you going to continue to hold?

Bull call spread strategy update

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Back on December 13th,  I suggested that a bull call spread can be used as an alternative to a covered call strategy. I was hoping that out of the three examples, there would be one good, one bad and one ugly. All three examples were just paper trades for discussion purposes. It turns out that all three paper trades were profitable if they were closed as of today at 11:00 a.m.

Bull Call Spread: An Alternative to the Covered Call

Quotes as of 11:00 a.m. on Jan 5, 2017

Example #1 Apple @ $116.08

Original buy was 100 shares of Apple at $114.90 sell one call option Jan 20 at $115.00 for $2.60

Action: Buy back call for $2.02 sell stock $116.08

Profit: ($116.08 – $114.90 + $2.60 – $2.02) = $1.76 divided by $114.90 = 1.53%

Original Call spread: Buy 1 Jan 20 $105 call for $10.45 – sell one call Jan 20 at 115.00 for 2.60

Action: Buy back call for $2.02 sell 105 call for 11.10

Profit: ($11.10 – $10.45 + $2.60 – $2.02) = $1.23 divide by $10.45 = 11.79%

Example #2 Netflix @ $131.36

Original buy was 100 shares of Netflix for 123.75 – sell Jan 20 call at $130 for $4.50

Action: Buy back the call for $7.95 sell stock for $131.36

Profit: ($131.36 – $123.75 + 4.40 – 7.95) = $4.06 divided by 123.75 = 3.28%

Original Call spread: Buy one Jan $120 for $9.15 – sell Jan 20 call at $130 for $4.50

Action: Buy back the call for $7.95 sell call for 14.10

Profit: ($14.10 – $9.15 + 4.50 – $7.95) = $1.50 divided by $9.15 = 16.39%

Example #3 Facebook @ $119.65

Original buy was  100 shares of Facebook for$119.40 – sell Jan 20 call at $120 for $3.10

Action: Buy back call for $1.68 sell stock for $119.65

Profit: ($119.65 – $119.40 + $3.10 – $1.68) = $1.67 divided by $119.40 = 1.4%

Original Call spread: Buy one Jan 20 $110 for $10.45 – sell Jan 20 call at $120 for $3.10

Action: Buy back call for $1.68 sell call $9.75

Profit: ($9.75 – $10.45 + $3.10 – 1.68) = $ 0.72 divided by $10.45 = 6.89%

The capital required to purchase 100 shares of each of these three stocks is $35,805 minus $1020.00 from selling the covered call options equals $34,785. Total profit of closing these positions today would have been $749.00 dividend by $34,785 equals 2.15% (not including trading fees)

The bull call spreads requires a total outlay of $3,005 minus $1020.00 from selling the exact same covered calls equals $1985. Total profit would have been $345 dividend by $1985 equals 17.38%. (not including trading fees)

A bull call spread allows for a higher percentage return with less capital. Plus it allows you to trade higher priced stocks. In case you don’t remember, both Apple and Netflix were trading over $700 before they did a 7 for 1 split. Many small investors didn’t have enough capital to invest in these two stocks. In hind sight, I could have pick higher priced stocks like Amazon ($778.00), Google ($790.00) or Priceline($1501.00) but I didn’t currently feel very bullish on these stocks.

There are many stocks trading in the $200 to $300 range like Goldman Sachs, Biogen, Tesla and Chipotle where a bull call spread could be an alternative to a covered call strategy. To reduce trading costs, I would recommend call spreads that contain a minimum of buying 3 calls and selling 3 calls on the underlying stock.

If you are bullish, earnings season is just around the corner, a call spread strategy could boost your returns. Please note that call spread trading requires having a margin account and approval from your discount broker.

Disclaimer: This post is for discussion purposes only!

 

Tips on rebalancing your retirement portfolio

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Many investors are in for a rude awakening when they open their year-end retirement plan statements. The bond portion will probably show negative returns. It could even wipeout a good portion of their positive returns from owning equities.

Now, the most common method used in rebalancing your established asset allocation mix would be to reduce the holdings that are up in value (sell stocks) and buy assets that have fallen in price (buy bonds). This practice may have worked very well in the past but interest rates are going up forcing bond prices down.

The chart below compares the S&P 500 with the IShares 20 plus year Treasury bond ETF

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“The decades-long bull market in U.S. Treasuries has finally drawn to a close following Donald Trump’s surprise presidential election victory, according to mutual-fund manager Bill Miller.”

“Miller isn’t the first to call time on the bond bull market. Economist Henry Kaufman, the original “Dr. Doom” who is credited with calling the last bond bear market in the 1970s, told the Financial Times this week that the current bull run is at an end.”

In the past, when the Federal Reserve decided it was time to unwind its easy monetary policies, it would raise the federal funds rate fairly quickly. The Fed believes a neutral stance on monetary policy is reached somewhere above the 4% level. The current Federal Reserve is moving slower than normal. Based on an average of three rate hikes per year, it will take the Fed a little over 4 years to normalize interest rates.

Tip # 1

Short-term, reduce or eliminate investing in target date mutual funds since they automatically rebalance from equities to bonds. Plus they increase your bond exposure the closer you are to retirement.

Tip # 2

During a period of rising interest rates, the prudent strategy is to reduce the duration of your bond portfolio. That could mean using a short-term bond ETF or a ladder of GICs both of which would allow you to benefit from an increase in rates.

Tip # 3

If you’re comfortable with a little credit risk, use short-term investment-grade corporate bonds to get a little more yield.

Tip # 4

Cash is by far the safest asset class. Move some of your equity allocation and some of your fixed income allocation to cash. I have my doubts that President Elect Trump can get congress to pass all his stimulus agenda and even economists are unsure if these policies will actual increase economic growth.

Corrections in the bond market are not as uncommon as you think. Most have been short in duration. See the chart below:

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Keep in mind that in the past, rate hikes were implemented  at a much faster pace than what the current Fed has purposed. Losses in the bond market could continue for longer than expected.

Could President Trump cause another Great Recession?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Being Canadian, I am not trying to influence any of my American readers on who they should vote for next Tuesday. However, my investment portfolio is heavily invested in the U.S. stock markets, I shudder at the thought of what could happen under President Trump. Naturally enough, investors and analysts hate uncertainty. Hillary Clinton largely represents the status quo. Mr. Trump is more like Forrest Gump’s box of chocolates “You never know what you’re going to get.”

What exactly happens the day after? To markets? To the economy?

The conventional wisdom is that a Trump victory would lead to a swift, knee-jerk sell-off. Many investors will choose to sell stocks and ask questions later. The Mexican peso would most likely fall on fears of a trade fight along with ETFs that contain Mexican stocks. Some insurance companies could tumble on the uncertainty of what would happen if Obamacare was repealed.

A worst case scenario is Mr. Trump’s anti-trade policies would send shock waves around the world. Add a stock market crash and it would plunge the world into recession. Europe’s economy is very fragile and it wouldn’t take much to tip Europe back into a full blown recession. This would lead to a serous banking crisis that could spiral into emerging markets.

The biggest test for the stock markets might be pegged to the future leadership of the Federal Reserve. There is much more uncertainty regarding who Trump might nominate, though he has made it clear he would not re-nominate Chair Yellen.

Now, a handful of economists have suggested that despite all of the promises made by both candidates, odds are high that whoever the next president is, they will preside over a recession. They argue that we are in the second-longest bull market of all time and the eighth year of this economic expansion. It is hard to believe that we will go through the next four years without a hiccup. If merger activity is a gauge of the market’s cycle, the recent spate of deals suggests we’re closer to the ninth inning than the first.

In reality, it’s impossible to predict how the markets would settle after an initial sell off. It will take time for investors to truly make sense and “math out” how his policies would affect the economy. Now, Trump’s bark will be a lot worse than its bite in terms of actual implementation of his anti-globalization position. Hopefully, a split in the congress and the senate will stop Trump from carrying out any outrageous election promises.

Am I worry about the U.S. election? Not really because I am an option trader. I have sold covered calls to protect most of my U.S. stocks. I have sold only a few cash secured puts on stocks that I am comfortable holding long – term. Plus, I have some extra cash just in case of a market sell-off. I am very comfortable switching from selling cash secured puts to buying puts if there is a bear market.

Where am I going to be next week? On vacation from the markets in Orlando, playing golf with my golf cronies. Hoping that they don’t ask for any financial advice and looking for another hole in one.

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Should you bet your portfolio on who will be the next president?

Republican presidential nominee Donald Trump shakes hands with Democratic presidential nominee Hillary Clinton following the second presidential debate at Washington University in St. Louis, Sunday, Oct. 9, 2016. (AP Photo/Patrick Semansky)

Who’s going to be the next president? The betting odds on the election at gaming site Bodog as of Oct. 10 are Clinton -425 and Trump +325, meaning a winning $425 bet on Clinton will pay out $100, while a winning $100 bet on Trump would net you $325.

For investors, the important questions are how the election outcome could affect their investment portfolios and whether they should do anything about it. It’s a legitimate concern, considering the spikes in volatility this year caused by fears of global economic slowdown, dissolution of the European Union and policy reversal by the Federal Reserve.

A November election surprise could trigger renewed volatility in the financial markets.

Conventional wisdom has it that the markets favor Republicans in the White House because they typically fight for lower taxes and less regulation. Donald Trump, however, is not a typical Republican candidate.

Trump has promised tax cuts, but he has also railed against the “rigged” economy and talked of building walls to keep out neighbors. The market does not like uncertainty, and Trump may be as unpredictable a candidate as either party has ever fielded for the White House.

It stands to reason that a Trump victory could hurt more than just the Mexican peso and the stock market. His bravado toward global trading partners and his talk about renegotiating trade deals and global security pacts could also put a chill in financial markets generally.

On the other hand, a President Clinton might also rock some boats. If Clinton wins, energy stocks could arguably take a significant hit. So might health-care stocks. Many believe her support for a financial transactions tax on high-frequency traders could seriously damage sentiment in the markets.

Fear on Wall Street could spark a sell off no matter who wins. It could provide investors with a great buying opportunity. Having some cash in your portfolio may be a prudent option to take advantage of market volatility.

A candid conversation with my former stockbroker

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My ex- stockbroker and I have remained good friends even though I transferred all my accounts to a discount broker many years ago. I was introduced to Bob (not his real name) by my insurance agent back in 1988. Bob taught me a lot about the inner workings of the brokerage business.

Both Bob and I enjoy playing golf. Every year Bob invites me to play golf at his private golf club. We have one rule: Never talk about the financial markets on the golf course. However, we did have a very interesting conversion, over a few drinks, after our round of golf.

“So Bob, I noticed that you seem to be very happy and relaxed today; you didn’t even call the office.”

“Yes, I am a lot happier. Over the past few years, I have convinced my clients to move their money into Dimensional Funds. I only have five clients who insist on buying and selling stocks. It is less stressful than trying to find stocks that outperform the market.” 

“There are so many fund companies, why did you pick Dimensional Funds?”

“All their funds have very low management expense ratios. Their fees are even lower than a lot of ETFs. They are sold exclusively through financial advisors. Advisors have to attend a three day symposium in California to get approved to even sell their funds.”

“Are you still one of the top revenue producers at your firm?”

“No, I am making less money, I charge my clients 1% commission to manage their money.  But, the upside is less stress and more time to play golf.” (big smile!)

“You and I both know that the majority of fund managers don’t outperform the market over the long – term.”

“I agree. Did you know that Harvard University’s endowment fund fires their fund managers every five years? However, Dimensional managers don’t try to predict market trends or time the market.  They keep costs down by not trading and selecting anywhere from 300 to 500 different stocks in their portfolios. They focus more on diversification, small cap and value strategies to achieve more consistent returns.”

“Have you ever fired a client?”

“Yes, so far only two clients. I played hockey on the same team with one client that kept on asking about stocks while I was having a shower after the game. When I changed brokerage companies, I referred him to another broker. I also recently tried to convince a client not to sell all his Dimensional funds. He went to 100% cash and then had the nerve to blame me that I sold his funds that had increased in value.”

“Why did you change your brokerage company?”

“Too much pressure to sell their in house products. Plus I was obligated to sell bought deals in IPOs, secondary issues, bonds and debentures.”

“I do remember a big bond issue that you didn’t like and got rid of through my margin account. Come to think about it, I really helped you get rid of a lot of junk offerings over the years.”

“Yes you did, but you always made some money on the deal! “

“True, but you always made a lot more than me!” (both of us laughing) 

“You really believe in Dimensional Funds?”

“Absolutely, I show new clients my investment portfolio which contains nothing but Dimensional Funds. The only other investment that I own are shares in the bank that owns my brokerage firm. I keep that account private.”

Are you concern that in January 2017, your commission fees will show up on clients monthly statements?

“A good question, I have some very wealthy clients. Not sure how they will react paying me 1% on their investments over the course of the year.” 

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What is a ‘Bought Deal?

A bought deal is a securities offering where an investment bank commits to buy the entire offering from the client company. A bought deal eliminates the financing risk for the company, which is able to ensure that it raises the intended amount of funds from the securities offering; however, the client firm will likely get a lower price by taking this approach.

A bought deal is more risky for the investment bank, because it must then try to sell the securities to other investors. The investment bank takes all of the risk that the securities may not be able to be sold, or more commonly, that they may lose value before they can be sold, resulting in a net loss.

Source: Investopedia

Disclaimer: This post is for educational purposes. I don’t own any Dimensional funds nor do I recommend buying them at this time. I do know that Bob only gets paid about 60% of the fees that he generates. The other 40% goes to the brokerage firm.