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  • One biotech with billions in cash flow could benefit from expanding the use of its cancer drugs.
  • Despite assurances from its C-suite, this multinational bank remains too risky to buy.

The stock market’s recent rally hit a speedbump early Wednesday when OPEC announced plans to cut oil production by 2 million barrels daily, potentially contributing to inflation. In addition, ADP’s job report showed more jobs were created in September than forecast, reducing the chances that the Fed will slow its pace of rate hikes.

The news coincided with major market indexes bumping into key resistance near their 21-day moving averages. It didn’t help that there were fewer market participants today because of Yom Kippur. The combination caused the S&P 500 to decline about 1.8% in the first hour of trading, sparking fear Monday and Tuesday's rally, during which New York Stock Exchange advancers beat decliners by 5.5:1, would pan out similarly to the short-lived rally in early September.

Fortunately for bulls, bargain hunters returned, rallying the S&P 500 from its intraday lows to finish the session down just 0.19%.

If, after Yom Kippur, buyers keep the indexes above Monday’s low, picking up shares in this big-cap biotech could pay off. However, despite a big drop, this beaten-down bank should remain off your shopping list for now.

A Cash Flow Goliath

Gilead Sciences  (GILD)  revolutionized treatment for HIV in the 2000s, and it functionally cured hepatitis C in the 2010s. Lately, it’s become “one to watch” in oncology treatment. As a result, the company’s highly profitable, kicking off billions of dollars in dividend-friendly free cash per year.

In the second quarter, scripts for top-sellers, including the mega-blockbuster Biktarvy, the world’s most prescribed HIV drug, with 44% market share, resulted in sales of $4.2 billion, up 7% year over year. Also, growing demand for next-generation cancer treatments, including Yescarta, a chimeric antigen receptor T-cell therapy for lymphoma, and Trodelvy, a breast cancer drug, produced revenue of $527 million, up 71% from one year ago.

That largely offset lower sales for Veklury, a COVID-19 treatment that’s seen demand decline as hospitalizations have fallen. As a result, Gilead’s total revenue was essentially flat year over year in Q2; excluding Veklury, product sales grew 7%.

In 2021, Veklury's sales totaled $5.8 billion, including peak sales of $1.9 billion in the fourth quarter. In Q2, sales were $445 million, down from $829 million in Q2, 2021. Veklurly sales through early 2022 are a headwind to revenue growth. However, growth should improve, stabilizing earnings, as year-over-year Veklury sales headwinds ease.

Analysts estimate that earnings per share will be $6.62 this year and $6.48 next year, resulting in a price-to-earnings ratio of about 10, which is at the low end of its 5-year range of 8 to 16.

In the future, sales and earnings growth could benefit from expanding the use of its HIV and oncology drugs. For example, an FDA decision on lenacapavir, an HIV drug, is on tap in December. If approved, it would be the first therapy available with dosing every six months.

Additionally, the FDA could clear the way for greater use of Trodelvy. In Q2, its sales as a treatment for metastatic triple-negative breast cancer grew 79% year over year. Sales could climb even more if the FDA approves its use in HR+/HER2- patients following positive trial data in September. Further out, it's being studied in bladder and lung cancer, too.

The future looks similarly bright for Yescarta. It secured the FDA OK for second-line use in relapsing/refractory diffuse Large B-Cell Lymphoma in April, causing its sales to grow 40% sequentially to $295 million in Q2. A decision on its use in that indication in Europe is expected soon.

The opportunities in oncology alone prompted J.P. Morgan to estimate that the company’s cancer sales could reach $5 billion annually in 2030, leading it to upgrade shares from neutral to overweight yesterday.

It’s not just the fundamental story that could make buying Gilead Sciences shares smart. Its chart looks good, too.

In “How to Trade Gilead Sciences as Charts Get More Positive,” Real Money technician Bruce Kamich writes:

“In the daily bar chart of GILD, below, we can see that the shares have been working on a bottom pattern since February. Buyers appeared in March and again in June around the $58 area. Buyers came in again at around $60 in early August and then around $62 in the past few weeks. GILD is trading above the rising 50-day moving average line and above the still declining 200-day line…Trading volume has been improving since June. The On-Balance-Volume (OBV) line made a low in March and has trended upwards. The Moving Average Convergence Divergence (MACD) oscillator is on the zero line but could turn upwards to a new buy signal.”

CHART-Street-Smarts-100522

OBV is essentially a running total of up minus down day volume. MACD subtracts the 26-day Exponential Moving Average (EMA) from the 12-day EMA. A bullish or bearish signal triggers when that result crosses over or below zero, or the 9-day EMA.

How far could Gilead’s shares run? Using point-and-figure charts, Kamich comes away with a target of about $80. He concludes, “I like the current look of the charts and indicators. Traders could go long GILD on strength above $68 and above $72. Our price target is $81 for now.”

Given the company’s shares were trading in the mid-$80s in 2020 and they have support near $57, about 12% lower”, the risk/reward is intriguing, especially since its dividend yield is a healthy 4.5%.

This big bank remains a no-go

Last week, investor fears escalated over the worry that dislocations in credit markets could cause a big bank like Credit Suisse  (CS)  to falter. The bank’s shares have fallen 60% from their January peak, including a 26% drubbing in the third quarter.

Over the weekend, Credit Suisse’s CEO called investors to convince them of the bank’s stability. The CEO’s calls and Bank of England bond market intervention last week may provide some wiggle room. However, that doesn’t mean investors should view Credit Suisse as a value-stock worth buying.

Real Money Pro’s Ed Ponsi, who warned about Credit Suisse in July when shares were about $7, is unimpressed. He wrote this week:

“On Monday, the stock closed at $4.01. In the four months since that article appeared, the bank's stock lost 43% of its value. The chart is a long, downward spiral of lower highs and lower lows. Credit Suisse's long-term chart is even more disturbing. In April 2007, the stock traded above $79 (point A). After the 2008 crash, Credit Suisse fell as low as $18 (point B). Today, the stock is worth just a fraction of its post-crash price (point C).”

CHART-Street-Smarts-2-100522-

Credit Suisse’s CEO is doing an impromptu roadshow to bolster support isn’t surprising. We’ve seen this movie before with Lehman Brothers. The fourth largest investment brokerage firm went bust in September 2008 after its C-suite similarly reassured investors.

Back to Ponsi:

“It's important to understand that if the Swiss banking giant does have a problem, it would never admit it. Doing so would cause the company's stock and bonds to plummet, making a rescue all but impossible…In April 2008, Lehman Brothers' Chief Financial Officer Erin Callan tried to explain away the investment bank's troubles as an issue of perception. At the time, Lehman had just raised $4 billion in capital by issuing additional shares of its soon-to-be worthless stock…If Lehman had revealed the true depth of its difficulties, would anyone have purchased those shares?...I feel as though I've heard all this before. Where there is smoke, there is probably fire.”

That’s discouraging, and it’s not just Ponsi who thinks Credit Suisse is too risky. Bruce Kamich weighed in on the bank on Tuesday, writing:

“CS has been in a persistent downward trend the past 12 months. Traders and investors have been selling the stock for months now. CS trades below the declining 50-day moving average line and is roughly at 50% of the intersection of the declining 200-day moving average line…The On-Balance-Volume (OBV) line is in a downward trend and confirms the price decline as traders are more aggressive sellers. The Moving Average Convergence Divergence (MACD) oscillator is in a bearish alignment below the zero line.”

According to Kamich, point-and-figure charting suggests risk down to $3.2 per share, leading him to conclude it’s best to “avoid the long side of CS as further declines are possible.”

The Smart Play

Kamich notes you can buy Gilead Sciences on closes above $68 and $72 for upside to the low $80s. Currently, shares are trading at about $66. Suppose you’re interested in adding this big-cap biotech to portfolios. In that case, you could wait for shares to close above Kamich’s threshold or take a small starter position now and add more shares if it successfully moves above those levels. You can control your risk with a stop loss below the last week's low or, if you want to give it more room for long-term portfolios, below the long-term support, near $57. 

As for Credit Suisse, there's no reason to take on the risk of owning it until there's much more clarity.

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