Sell in May and go away?
Taking action on the old adage would have been a big mistake for investors owning Gilead Sciences (NASDAQ: GILD) stock. Shares of the big biotech jumped around 10% during May -- accounting for half of the stock's year-to-date gains. With this nice run, is it now time to take profits in Gilead stock? Here are arguments for both sides of the question.
Sell by June (or at least pretty soon)
There are at least three reasons I can think of for why some investors might be itching to sell some of their Gilead Sciences shares. First, the stock is rapidly approaching two key levels: Gilead's all-time high of nearly $117 set last Halloween and the consensus one-year price target of just above $121.
Second, anyone who has held Gilead for at least a year is sitting on top of some really nice profits. Shares are up 37% over the past 12 months. If you were smart enough (or lucky enough) to have bought Gilead stock five years ago, your initial investment has increased more than six-fold. It could be mighty tempting to lock in some of those hefty profits.
The third possible reason for selling Gilead stock perhaps makes the most sense, though. If you think the biotech's earnings growth will inevitably slow down in the not-too-distant future and result in a long period of stagnant share price movement, selling now could seem like a good idea.
And the truth is that, at least based on what we know now, Gilead's earnings growth likely will slow down. After all, it would be extremely difficult for a company with a market cap of close to $170 billion to sustain year-over-year percentage earnings growth near triple digits. While Harvoni will probably keep racking up more sales and higher earnings for Gilead, the growth rate will taper off.
Hold for a while 'cause Gilead's still in style
On the other hand, say what?! Selling any stock just because it reaches or gets close to an all-time high misses a critical point: That's what growth stocks do all the time. They regularly hit and blow past prior high marks. As for selling when shares meet an analyst's price target -- just say no. Don't rely solely on analysts' views for when to sell a stock (or buy a stock, for that matter).
When it comes to selling Gilead simply to take some profits off the table or because earnings growth might slow down, it's important to ask yourself, "Is there a better investing alternative right now?" There's a pretty strong case to be made that the answer to that question is "no."
You won't find many stocks from any industry (but especially sizzling hot biotech) with impressive financials and an earnings multiple below 13. Gilead claims both. And while earnings growth rates might slow down over time, the biotech's revenue and earnings should continue to grow at respectable levels.
Harvoni is the most effective hepatitis C drug on the market. Gilead Sciences held its own and then some in the battle against AbbVie for positioning on payer formularies. Its HIV franchise continues to do well. Gilead's pipeline is also stocked with quite a few promising drugs, including simtuzumab, which targets NASH, a liver disease for which no effective treatment is currently available.
There's also Gilead's stockpile of over $11.2 billion in cash, cash equivalents, and short term investments. Gilead will use much of this cash to buy back shares, pay out dividends, and likely buy smaller biotechs or their experimental drugs. The first option rewards investors by driving Gilead's share price up. The second option rewards investors by simply giving them money. And, based on Gilead's prior track record, the third option could be the best of all by opening up great new markets.
Warren Buffett once said, "When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint." Great advice from a great investor. Let the good times roll.