Silly Analyst

Sell side analysts and investors often frame any incoming data in a way that fits with their positioning rather than looking at the data objectively. The Morgan Stanley analyst who covers Gilead Sciences has a hold on shares of Gilead Sciences but is the largest bearish voice on Wall Street regarding the company. He put out a note yesterday that highlights his biases.

The Morgan Stanley analyst says that he met with Gilead management and they told him their near term focus is buying back shares. As a Gilead shareholder that is music to my ears. There is nothing I like to hear more than when a company with a cheap stock price, low leverage and lots of cash buys back shares. It increases the value of the stock and puts a floor under the shares while they are in the market.

The Morgan Stanley analyst managed to frame a buyback as a negative. He points out that the value of employee stock options outstanding is $1.35 billion so a large repurchase will largely only offset that dilution. That sounds logical except that he and other analysts project earnings on a diluted basis, which already counts those shares. He also points out that approximately half of Gilead's earnings is overseas and unless they choose to repatriate cash, only half their earnings is available for share repurchase. That is true for nearly every large cap company.

The danger with being smart is that you can find a way to justify any position. Harvard professors were able to come out with justifications for the Internet bubble that laymen simply could not have thought of. In the stock market it pays to stick to common sense. A share buyback from a reasonably priced, strong cash flow producing, unleveraged company is a good thing. Period.

3 comments:

Anonymous said...

Really makes no sense that some kid out of college with a 3.5 gpa who works for 3 years as a research associate can suddenly know enough about the market to start covering stocks and make buy or sell recommendations. Also huge conflict of interest anyway, so even if they are seasoned I still wouldn't believe them.

Buyside analysts on the other hand, are probably a little bit more qualified as well as unbiased.

Anonymous said...

What was it that Harvard professors said to justify the internet bubble ununderstandable in layman terms?

Anonymous said...

Stephen Harr's vendetta against Gilead is hard to understand. But he is pushing hard for another antiviral company, Vertex Pharmaceuticals. Vertex has no approved product, one hepatitist C late-stage candidate for which expectations are insanely optimistic, a $7.6 billion market cap, a burn rate of half a billion dollars a year--and, you will not be wholly surprised to learn, an investment banking relationship with Morgan Stanley. Most interesting of all: Gilead was founded in 1987, Vertex in 1989. Gilead is on track for $8 billion in revenue from 13 products and a 2010 PE of 13 or less. Vertex, twenty years after its founding, is still working on its first drug approval.