Event: Gilead (GILD) reports their Q2 results after the close, the options market is implying about a 4.5% one day post earnings move tomorrow, which is inline with their 4 quarter one day average move and a tad higher than the 10 year average one day move of about 4.3%. On April 29th, the day following their Q1 earnings the stock closed down 9% after posting disappointing results.
Price Action / Technicals:
GILD is down 14% on the year, and down 30% from its all time highs made in June of 2015. To suggest that the stock is at a precarious technical spot is an understatement as it is once again straddling the one year downtrend from the highs, with the only meaningfully break above having failed in a massive way in late April with the earnings gap:[caption id="attachment_65236" align="aligncenter" width="600"] From Bloomberg[/caption]
Draw the lines anyway you like, but the stock clearly failed at the long term uptrend back in April, is flirting with the downtrend from the all time highs, with clear technical support at the recent lows at about $80:[caption id="attachment_65237" align="aligncenter" width="600"] From Bloomberg[/caption]
From a purely technical standpoint the stock appears to be at an inflection point. Gap risk to support down about 10%, with little support below, and the possibility of a gap fill back towards the April breakdown in the high $90s.
What to expect? Investors are grappling with the massive deceleration of eps and sales, up 55% and 110% respectively in 2015, to an expected 5% decrease in 2016. The stock is cheap at 7.5x expected 2016 eps of $12 a share, sporting a 2.15% dividend yield and a recently announced $12 billion share buyback in place. Investors want to hear more about how the company plans to deploy their $22 billion in cash on the balance sheet, ie acquisitions, that is the next big catalyst for the stock. Obviously investors are focused on drug pricing in the current political environment.
My View: Valuation, cash return, poor sentiment, poor performance all speak to the potential for a post earnings bounce if the company merely comes in line and guides in line. A second sloppy quarter in a row, and weak guidance and the stock is back at $80.
If I were long stock, worried about another gap lower I might consider a put spread collar into the potentially volatile event. Selling a short dated upside call, and using the proceeds to buy a put spread.
On the flip side, if I thought the stock would eventually breakdown I might look to sell weekly puts at the implied move, down about 5% and look to buy longer dated puts, a put calendar.
I think it is important to note, that when a stock/sector like GILD/Biotech are in a bear market, which they are, cheap can get cheaper (see AAPL over the last year).