NEW YORK (TheStreet) -- I recently wrote an article about RadioShack (RSH), where my main argument for buying was that everyone was negative. While this trade is still in its infancy, I will illustrate another recent example of a fade that cashed big profits for those who resisted obvious opinion and went against the grain.
Knowing absolutely nothing about livestock, I wrote about shorting lean hog futures in the face of a virus that everybody said would wipe out the pig population overnight. Of course, the fears were overstated as I suspected, and I made out like a bandit the next day as hog prices gapped down.
As a contrarian, I do trade potential popularity for simply being right and making money. It's a tough gig. I'll probably get ripped by the bulls for daring to short Gilead Sciences (GILD). Nevertheless, I'm making a small bet that no matter what Gilead's second-quarter earnings look like on July 23, the stock will still sell off.
Let me first say, this is not a high-conviction trade. I don't know very much about Gilead, but it doesn't matter. I've made bets like this over the years and they win more than they lose.
Still, the chance of taking a loss is high. I put the odds at about 60:40 in my favor that the Gilead short will be profitable within a week of Wednesday's earnings release. This is not a long-term trade, and if I'm right, I'll be covering my short the following morning. With Gilead trading at historic highs, up over 300% since 2012 and nearly 50% since April, there is no margin for error on this highly anticipated second-quarter earnings report.
The 60:40 odds may not sound so great, but profiting on a trade like shorting Gilead into its quarterly earnings comes down to being able to understand and properly manage obvious public sentiment cues while blocking out the noise. For Gilead, the positive sentiment is off the charts. Analysts can't stop talking about how big a blowout quarter Gilead is about to report:
Bernstein: Total revenue forecast for the second quarter is now over $7 billion, or 24% above recent consensus. EPS estimate is $2.24, or 35% above recent consensus.
JPMorgan: A little more conservative than Bernstein but raises earnings per share to $1.73 from $1.32. Second-quarter revenue forecast of $5.6 billion is based on Sovaldi sales surging to $2.75 billion from previous $1.8 billion.
Credit Suisse: Raises Sovaldi sales target to $2.6 billion for the second quarter and $9.3 billion for 2014. That's up from $1.8 billion for the quarter and $7.6 billion for the year.
Nomura: Expects Gilead to both buy back shares and introduce a dividend. Raises peak sales of Sovaldi to $22 billion from $16 billion for 2014.
Of the 30 analysts covering Gilead, 26 rate the stock a buy, with four holds. No analysts have a sell rating on Gilead. Wall Street is telling the public that you can't get a more sure bet than buying Gilead. It's not surprising that everyone is on the same side of this play. It almost sounds too easy.
With all of these lofty expectations, I believe Gilead's actual results won't even matter. Wall Street is setting up the retail investing public for slaughter. My Gilead trade is a small bet short into Wednesday's earnings. Good luck to everyone, even those who will undoubtedly fade me.
At the time of publication, the author held short positions in Gilead, although positions may change at any time.
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This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
TheStreet Ratings team rates GILEAD SCIENCES INC as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate GILEAD SCIENCES INC (GILD) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, impressive record of earnings per share growth, compelling growth in net income and notable return on equity. Although the company may harbor some minor weaknesses, we feel they are unlikely to have a significant impact on results."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- GILD's very impressive revenue growth greatly exceeded the industry average of 26.6%. Since the same quarter one year prior, revenues leaped by 97.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 209.30% and other important driving factors, this stock has surged by 47.30% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, GILD should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- GILEAD SCIENCES INC reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, GILEAD SCIENCES INC increased its bottom line by earning $1.83 versus $1.64 in the prior year. This year, the market expects an improvement in earnings ($6.65 versus $1.83).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Biotechnology industry. The net income increased by 208.4% when compared to the same quarter one year prior, rising from $722.19 million to $2,227.41 million.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Biotechnology industry and the overall market, GILEAD SCIENCES INC's return on equity significantly exceeds that of both the industry average and the S&P 500.
- You can view the full analysis from the report here: GILD Ratings Report