DGI Adventure – 01-10-2016 Investment Thesis – Gilead Sciences Inc (GILD) – $96.10/share

Please visit the core
philosophies
article on my
investment thesis process
for a full explanation of the components of this
article.

Dividend Cycle

GILD paid its first dividend ever in June of 2015, so it has
yet to establish a predictable dividend calendar yet. If I had to guess the
next dividend will be in March of 2016. The first three dividends were
$0.43/share. Since dividends are so new for GILD, I won’t even begin to try to
predict what the dividend might be. They have oodles of cash though. They could
raise it if they wanted to.

Investment

I currently own 15 shares of GILD in my ROTH IRA which I
bought back in April of 2015. I’m not sure why I bought the shares in my ROTH since
it’s more of a capital growth company that just initiated a dividend rather
than an income oriented asset. It’s kind of silly to hold a capital growth
story in a tax-advantaged account.

The share price has been volatile, and with recent market
weakness, it has gotten close to my cost basis in the ROTH. My cost basis is
$96.56333/share; it closed Friday at $96.45. So my idea is to buy GILD
shares in my taxable account, and then if it bounces back into the ~$110 range
like it’s been, sell the shares in the ROTH and redeploy that capital into
something that generates more income. I make a little money for the
ROTH to justify the trade fee friction, but at the end of the day I have the
same amount of exposure to GILD, with a more tax-conscientious distribution of
assets. Works on paper! Let’s see if I can execute.

Since I bought GILD prior to developing my
investment thesis process
, I decided to go through the exercise, even
though I’m really only trying to shift the type of account that holds the
shares.

The QC (Quantitative
Case)

image

LOL (Limit Order
Logic) – $96.10

Not much mystery
here.  My original cost basis was
$96.56333. With trade commission of $6.95, I need to buy 15 shares at $96.10 to
replicate that cost basis. I might buy a couple extra shares because I’m
feeling spunky.

QWaF (Qualitative
Warm and Fuzzy)

Screw the qualitative part for a second. Look at those
growth numbers. Just take a minute and look at them.

Okay you good? See it? Now consider the fact that you can
buy this stock for a PE ratio of 8.8. That’s not a typo. The stock price is 8.8
times the company’s earnings.

Are you kidding me?

The TTM stats are all sporting double digit YoY growth
rates. TTM cash flow from operations ($18B by the way) is almost 50% higher
than 2014. And the stock is selling for a PE of 8.8?

I will reiterate:

Are you freaking kidding me?

Oh yeah, and their pipeline is bursting at the seams. They
have $16B in cash if they want to buy more prospects. They just might cure aids
(they already basically cured hepatitis.)

 CPR (Cold and Prickly
Risks)

Obscenely expensive pharmaceuticals are kind of a hot button
thing right now. I guess you would call that regulation risk? They might not be
allowed to charge whatever the hell they want for medicines that CURE
previously incurable diseases. Oh well. I’ll bet they’ll still get to charge a
lot more than it costs to make them.

If the PE were a lot higher I might be a little worried
about a pharmaceutical company losing its license to print money. But with a reverse
DDM DGR of 8.2% and a PE of 8.8 the fair value bar is pretty low and the upside
is damn near unlimited.

Yes please.

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