Gilead Sciences (Nasdaq: GILD) rallied last week, in the midst
of an otherwise dreary market.
Chart Courtesy of StockCharts.com
First, it's good to see that Gilead can rally during a tough
market. That's a sign of relative strength, and it makes
the stock stand out and worth consideration for ownership.
So the first inclination is to see why the stock rallied. Off we went, and lo
and behold, there was a reason, the company is buying back stock.
To be sure, there are good reasons to buy back stock. One is that by buying back
stock the balance sheet is improved, although there is an outlay of cash. Also
by reducing the amount of stock outstanding, earnings look better as there are
fewer shares among which to divide the gross profits.
Still, you'd like to see a biotech stock rally because it has a blockbuster drug
or a killer pipeline, not because its' buying back stock. And then you have to
wonder if the company can't find anything better to spend its money on, such
as maybe developing better drugs or raising employee salaries during tough times.
Sure, the company's HIV drugs are selling briskly, but that was announced three
days before the buyback. Yes, the stock rallied on the news, and then it rallied
further on the buyback. But the big question is what about the future blockbusters?
Shouldn't that billion dollars be used for drug development or something along
those lines?
What's the bottom line? The charts rule, but they serve you better if you look
behind them once in a while. We'll be watching Gilead closely, but are holding
on to our powder here. What would make us change our mind? A continued rally
in Gilead may lead us to reconsider our position, at least on a trading basis.
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