Answers About Questionable Stocks

10/3/2016


No matter the season, no matter the state of the market, when a stock performs poorly, our subscribers want to know why.

In the following paragraphs we answer three questions about troubled stocks, both on and off our recommended lists.

Q I bought Gilead Sciences ($79; GILD) for more than $100 per share in May 2015. You sold it in the Sept. 5, 2016, issue for less than $80. What went wrong with this stock?

A Gilead has been a big disappointment to us. We were hoping for a rebound, but the worse the news got (complaints about high drug prices, slowing volume growth, competitive concerns, refusal of some insurers to cover its drugs, etc.), the less confidence we had that the company would meet profit expectations. Sometimes the best move is to take your losses and move into something better. AbbVie ($64; ABBV) offers a solid upgrade option.

A year ago, things looked different. Gilead delivered robust growth, and rivals had yet to catch up with its groundbreaking hepatitis C drugs. In retrospect, we should have sold after it posted mildy disappointing March-quarter results.

Q Shire ($200; SHPG) hasn't performed well over the last year. Why do you guys still like that stock?

A While Shire has risen just 3% since the end of July, it has outperformed many of its peers; the S&P 1500 Health Care Sector Index is down 3%, among the three weakest sectors. Much of the sector's lag probably stems from two issues:

1) Political and consumer backlash against drug prices isn't going away. Many investors fear what might happen on the legislative and regulatory front after the election, particularly if Hillary Clinton wins. Continued volatility would not be a surprise.

2) Some investors have rotated away from stocks perceived as defensive. As the chart below shows, of the six top-performing sectors since the end of July, five (consumer discretionary, financials, industrials, materials, and technology) are perceived as more economically sensitive than health care.

As for Shire, we still like the orphan-drug story. These medications have historically held up better against generic competition than mainstream drugs, and they're harder for politicians to attack. We don't see a lot of near-term catalysts for Shire, which explains why we don't have it on the Buy List. But, in our view the market still undervalues Shire's product pipeline.

Q I bought Valero Energy ($55; VLO) last year on the strength of its high Quadrix Overall score. The Overall score has fallen to 56 and the shares are down big. What happened?

A The problem with Quadrix scores is that they change as a company's fundamentals change. That's also the biggest strength of Quadrix, which we designed to rank stocks relative to roughly 5,000 other U.S.-traded companies.

We can trace the decline in Valero's Overall score to an erosion of growth, falling profit estimates, and weak share-price action. We rate Valero a B (average), which means we think the stock has middling year-ahead potential. Anyone who owns Valero should at least consider selling it.

Valero is a perfect example of why we don't buy stocks based on Quadrix scores alone. As late as the end of 2015, Valero earned a 100 Overall. However, the macro picture for energy in general and refiners in particular wasn't great, and we never recommended any refiners for purchase.


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