Good Old Gilead

In the Summer of 2010 I made Gilead the largest position in my portfolio. The stock was being dumped by growth obsessed investors and was easily the most hated stock in biotechnology. Gilead was trading at $32 and had about $5 in cash. They were set to earn the other $27 in less than 6 years even if they never discovered another drug. Their drugs had a long proven track record of working, as people with HIV seemingly live a full life taking their drugs. Those are the type of odds I like. To add to it they announced a $5 billion repurchase plan and started aggressively repurchasing their own shares. Nine months later in March I was able to sell the shares at close to $42. It was my biggest individual stock winner ever at the time from a dollar perspective, not percentage.

I made my mind up to repurchase Gilead one weekend this Fall, when the stock traded slightly under $40. That Monday, Gilead announced its $11 billion purchase of Pharmassett. I thought I had dodged a bullet but growth investors came roaring back into the stock and bid it up to $55. Management was selling shares aggressively as growth investors were piling back in. This morning the rug was pulled out and Gilead is down 20%.

This story reinforces my philosophy of not paying for growth. When a stock is beaten down a lot of bad news is priced in and good things tend to happen. However, when growth investors start bidding a stock up everything needs to go right. Even a small misstep like Gilead just had can cost 20%.

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