GILD Stock: Value Trap?
Gilead Sciences, Inc. (NASDAQ:GILD) stock is a heavyweight in the biotech space; the company bolsters a $105.0-billion market cap and ranks high among its competitors like GlaxoSmithKline plc (NYSE:GSK) and Pfizer Inc. (NYSE:PFE).
The biotech space has been known to make and break many hearts, and I am not talking about the millions of patients that are saved and treated by the medical breakthroughs that many of these companies have brought to market. This sector is known to provide an investor with easy riches, and just as quickly take them away. The volatility is created by the weight that is placed on the news surrounding U.S. Food and Drug Administration (FDA) approvals and clinical trials.
There are two camps that like to place a value on an investment: fundamentalists and chartists. From a fundamental perspective, Gilead stock sports a price earnings (P/E) ratio of seven. This is a low P/E ratio for a biotech stock, as the industry average is closer to 20. Investors could view this investment as a value play. The problem is, the value that the fundamentalists perceive is not being supported by the GILD stock chart. From a chartist’s point of view, the pattern that has set up is worrisome, and has bearish implications. The chartist view differs completely from the fundamentalist view.
The following Gilead stock chart illustrates the pattern that is causing chartists some distress.
Chart courtesy of StockCharts.com
A rounded top is a technical pattern that usually signals a trend reversal. It is common to see these patterns at the end of an uptrend. The longer in duration that it takes to complete the pattern, the more weight that is placed on its significance increases. This pattern could be signalling the beginning of a bear market for GILD stock. A surge in share price would negate this pattern, but until such an event presents itself, the pattern is bearish and worrisome.
The following short-term chart of Gilead stock supports the bearish premise.
Chart courtesy of StockCharts.com
In October 2015, GILD stock generated a “death cross.” A death cross is a bearish indicator that is produced when a faster 50-day moving average, highlighted in blue, crosses below a slower 200-day moving average, highlighted in red. Traders use moving average indicators to confirm a trend. This indicator is bearish and warrants stepping aside from long positions, or taking a short position. It is never wise to trade against this signal.
It is not uncommon for patterns to be embedded within one another. So with the rounded top, another pattern has developed a falling wedge. This pattern is defined by two trend lines that are both trending downward. The resistance line has a steeper slope than the support line. This pattern can be viewed in a bullish tone. But in order for the pattern to resolve itself in that light, a break of resistance is needed.
Compounded with the bearish bias is the fact that Gilead stock is trading below both moving averages, and the slope of both moving averages is now falling. There is no way to spin this action in a positive light.
The Bottom Line on Gilead Stock
GILD stock may seem like a value stock if I base my assumptions on the price-earnings ratio. A problem quickly arises if I try to pass that premise on the Gilead stock chart. The chart paints a distinctively different picture. The pattern that has set up is bearish, and is known to signal the beginning of a bear market. If this is true, than the perception of value is nothing more that a trap to lure in unsuspecting bulls. A lot would need to happen to change my perception and, until that criterion is met, I will remain bearish on Gilead stock.