What do you do when you see an analyst disagreeing with the market? Even if the analyst is right, if the market is not on board yet with this, you need to wait until it is.
Some stocks are very easy to like, others may require a more optimistic view, and some are just plain difficult to be that positive on. The important thing though is to ensure that we are considering all the evidence out there and not just going with a narrower view of things.
This is the mistake a lot of fundamental analysts make, and while we can gain insights from the sort of information they look at, if the market action itself isn’t correlating with our view, the two just aren’t matching up, and they need to.
This isn’t just even about what may happen, but when it will happen. We can easily allow ourselves to become preoccupied with our analysis that we forget to check whether this data is even being confirmed yet, and it’s only when it does become confirmed properly that we stand a chance to be right.
Let’s suppose that we are looking at the numbers with a company and we think that there’s no way this should be trading as low as it is based upon our valuation of the company and its prospects. Perhaps it will start rising again one day, but that day has not arrived, and based upon what we are seeing in the market, it is disagreeing with us.
The market is always right though, and it may end up changing its view, but the trick here is to use our knowledge to prepare ourselves for if and when it does, because until it does, we know for certain that our idea isn’t going to work.
This is very important for investors to keep in mind when they read that someone thinks that a stock will go up to a certain level but it sure doesn’t look like it’s ready to. We could take a flyer on it, and many do, but why would we want to take on the risk that the prediction may not come true if we don’t have to?
We Need to See Our Investing Ideas Confirmed First
The trader’s adage of not looking to try to eat the head or the tail of the fish because it’s too full of bones applies to investors as well, and perhaps more so, since the risk that investors take on is so much greater. This is all about looking for the proper confirmation, and looking to avoid all the false starts or the false stops, the head and the tail, and seek the body of the fish where most of the meat lies.
Put another way, we need to time our entries and exits based upon the factors of performance and risk, and when we’re bullish on a stock but the market does not perceive it as such, this is no time to argue, because the probabilities that we need to seek just aren’t on our side yet.
This principle applies not only to technical analysis, but to fundamental analysis as well, and it is not that wise in fact to just jump in without considering the proper timing of this leap. It’s nice to get in early on a move if it makes sense to do so, but being too eager will just get us in situations where the odds just aren’t on our side yet and we will pay the price for this ultimately.
Perhaps later they will be, and the time may come where it may be wise to act on our analysis, when it and the overall view aligns more, but without this proper alignment, we’re not using our knowledge in a manner which will most benefit us.
Gilead Sciences is one of those stocks that is pretty hard to love right now. While most stocks are trending up, this one is not even seen as deserving to share in any of this, and has well underperformed the market not only lately, but for a long while in fact.
When selecting stocks, we want to be looking at not only how its price has moved, but how it has done relative to the market. This isn’t just about the opportunity cost of investing in one company over another, this is actually the proper way to measure a stock’s true performance.
Between 2012 and 2015, Gilead was a true darling, a big cap stock that just took off and rose more than 600% over this time. While it hasn’t dropped anywhere near as low as it was back before it took off, it’s decline from there has been a notable one, going from $119.80 in June 2015 to $64.79 now, and appearing to be going nowhere fast.
Gilead May Come Back, But It Sure Doesn’t Look Like It’s About To
Gilead is a medical biotech company and makes things like treatments for HIV and hepatitis. One of the things about companies who make pharmaceuticals is that the lead time is so long that their business circumstances can give us a clearer view of the future than we normally see with companies, providing a lag of sorts that allows us to see where they may be in a few years with better certainty.
A lot of Gilead’s business comes from treatments whose time to patent expiration is coming up, and patents are the stock in trade here. This is why you see stratospheric costs with some of these, for instance with a treatment for hepatitis that Gilead sells at a cost of $1000 per pill being replicated elsewhere for less than $5. The extra money earned is through their monopoly on it, and when this all ends, the big profits do too.
RBC Capital Markets are telling us that we’ve been too downbeat toward this stock and their downward sales trajectory. However, when you have both a stock’s technicals and fundamentals telling you not to be in something right now, that’s a tough thing to argue about.
Earnings are receding, and even more importantly, the company’s pipeline isn’t being kept up. Their chart also looks terrible, and there really isn’t much to like here, especially getting the amount of love needed to have this stock start taking off.
RBC’s Brian Abrahams reiterated his Outperform rating with Gilead on Thursday, with a target of $84, a 30% move up from where it is now. The stock had been right at this level for a brief time during both January 2018 and August 2017, although it sure doesn’t look like it’s on its way back there right now. We have lost this 30% over the last 14 months, and while it may indeed come back at some point in the future, it’s hard to figure why this would be the time.
Gilead isn’t outperforming at all right now, it is instead well underperforming, by this 30% in fact, during a time where the broader Nasdaq is trading higher than it did back then. Outperform means that it is expected to do so going forward, not that it has, but that journey needs to at least begin before we should get very excited.
There is one potential bright light to the company’s future prospects, which is a new HIV drug that Gilead has in the works, which Abrahams sees has having the potential to get the company back on the right track. He feels that this drug “has underappreciated potential to transform HIV treatment and catalyze a next growth phase for GILD’s HIV franchise.”
This drug is still being developed though, and while the trials so far have been promising, investors thus far have not been that impressed. None of this is a secret to the market, but they just don’t seem to care. If and when they do, that’s the time to start thinking about all this.
This is not even about Abrahams being ultimately wrong or right about this, and this may indeed end up breathing new life to the company if and when it gets released, it is about the timing of the matter.
Even if we knew this will happen with certainty though, we’re still left with the decision as to when to jump on this and see the resurgence in the stock. If we believe that a stock will outperform, we at should wait until this at least begins to happen. Maybe that’s next week, or next year, but we do need to wait until the market at least appears to be agreeing, because this is what will drive the price up, and nothing else will do.
When we look at the whole picture here, this stock may have some promise down the road, but not so much at the present time. This may change, but we will be watching and waiting, as it would be prudent to do.