Best Stock for 2008: Gilead Sciences

Ring in the new year with more stocks for 2008.

When you're looking for a growth stock to hold for the long term, there's nothing more important than free cash flow. Combine excellent FCF growth with a reasonable valuation, and you have my pick for the best stock to hold in 2008: Gilead Sciences (Nasdaq: GILD  ) .

Shares of biotech giant Gilead have risen more than 20% since I first started waxing eloquent on the company's FCF growth in August. With some excellent sales-growth opportunities around the corner, in the form of recently approved or soon-to-be-approved drugs, Gilead still has plenty of room left for share-price appreciation.

The long-term health of any drugmaker depends on its drug pipeline, but if its marketed drugs are all a failure, then who cares how strong the pipeline is? So let's focus on Gilead's approved drugs first. On the back of its HIV drug franchise, Gilead has become a leader in treating the infectious disease. In the first nine months of 2007, Gilead's revenue rose 47%, and net income gained 155% year over year thanks to these HIV-fighting drugs.

Gilead's lead HIV combination drugs, Truvada and Atripla, have to compete against compounds from big-pharma behemoths such as Merck (NYSE: MRK  ) , GlaxoSmithKline (NYSE: GSK  ) , and Abbott Labs (NYSE: ABT  ) . Ordinarily, such potent competition would be a problem for any drugmaker, but Gilead's HIV drugs benefit from being one of the preferred front-line treatment recommendations among prominent organizations such as the U.S. Department of Health and Human Services.

The importance of those preferences for Gilead shouldn't be overlooked. They're formidable obstacles to competitors such as Merck and Pfizer (NYSE: PFE  ) , which have recently received FDA approval for new HIV therapies, but only as second-line agents.

One gripe that investors have about the biotech sector is how suddenly a drugmaker's fortunes can turn. These treatment recommendations and the huge amount of clinical data needed to get a new HIV drug recommended as a front-line therapy have effectively relegated most new HIV drugs to second-line agents, which will be used primarily when Gilead's HIV drugs and the other front-line treatments fail.

Take a look at how Gilead's free cash flow has grown in the three years before 2007. Yet '07 is on track to beat all of these growth rates, with FCF growth of 80% in the first nine months of the year.

Free Cash Flow*

Year-Over-Year Growth

Trailing 12 Months**

$1,643

66%

2006

$1,113

69%

2005

$658

43%

2004

$457

135%

*In millions.
**TTM period ended Sept. 30, 2007, vs. Sept. 30, 2006.

Investors don't have to worry that Gilead will lose its lead role in treating HIV, either, since the patents on its most important HIV drugs won't start expiring in the U.S. until 2017. Even better, Gilead should see European sales of its HIV franchise pick up as a result of the recent regulatory approval of Atripla in the European Union.

Investors can grab Gilead stock for about 26 times its trailing-12-months FCF numbers. That's not a steal, but with cash-flow growth of 80% over the first nine months of 2007 and 65% in the trailing 12 months, Gilead is poised for an increase in value in 2008.

What makes a stock the "best" is not only its potential for share-price appreciation but also the protection it provides against the financial and industry-specific risks it may face. Even if the housing sector implodes, consumer discretionary spending tanks, and the economy heads into a recession, Gilead's drugs will always have a market. That's the type of cyclical protection you want from the stock market.

With strong upside potential and built-in competitive and cyclical safeguards, shares of Gilead get my vote for best all-around long-term investment opportunity in 2008. I highly recommend that you head over to Motley Fool CAPS and give Gilead an "outperform" rating.

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