Indicator Signals More Big Gains Ahead for This Top-Ranking Biotech

The roller-coaster ride in the equity markets over the past few weeks has many investors shaken. For those wondering what to do right now with their trading capital, the answer is simple: Do what you always should and buy stocks that are outperforming their peers on a relative basis.

While this strategy isn’t foolproof, it has been a recipe for success for some of the biggest names in the investing game. And its efficacy has been backtested and proven by academics over the years. 

To identify stocks outperforming their peers, the key indicator I use is relative strength (RS).

Many investors are familiar with RS, which assigns a numerical score from 0 to 100 to a stock based on its price performance relative to other stocks in the market. This gives you a way to quantify the strength of a stock’s performance in the recent past, which often is a harbinger for how it is likely to perform going forward.


RS has been used for decades as a tool to help identify the strongest performers in the market. I think it is particularly important when the market is seemingly spinning out of control. Because relative strength is typically measured over a six-month period, it can smooth out outlier action in the markets that takes place over a few days or a few weeks. 

While the market has taken a beating over the past few weeks, my top pick is one of the leading companies in one of the best-performing sectors this year, biotech.

Pharmaceutical maker Gilead Sciences (NASDAQ: GILD) has soared 46% in the past six months, outperforming 95% of all other stocks it the market.

Coupled with its RS rank of 95 is the company’s outstanding fundamental picture. 

Although Gilead produces and sells a wide array of drugs for various viral, fungal, respiratory and cardiovascular diseases, it is its pricey hepatitis C drug Sovaldi that is creating all of the hype. Sovaldi, which was approved in December 2013, already has a much better cure rate than any other hepatitis C drug on the market.

Despite its high price tag, the adoption rate has been outstanding, and it’s led to huge earnings growth in the first two quarters of 2014. In Q1, Gilead saw EPS expand 208%, while in Q2, it almost doubled that with 372% growth. 

Top-line growth was nearly as impressive, with revenue spiking 97% in Q1 and 136% in Q2. For the third quarter, scheduled to be reported on Oct. 28, the company is expected to see EPS growth of about 270% and revenue growth over 115%. 

Shareholders were treated to more good news this month, when it was announced the company was awarded regulatory approval for a follow-on medication to Sovaldi. The new drug, Harvoni, is used to treat patients with a condition known as Genotype 1 hepatitis C. This is considered the most difficult version of hepatitis C to treat, and it’s also the most common form of the disease in the United States. 

Harvoni has proven to be 94% to 99% effective, and it costs even more than Sovaldi, running patients upward of $1,000 per day. Solvaldi’s cost hasn’t kept the drug from widespread adoption, and I don’t think the price of Harvoni will be an impediment either.

The bottom line for Gilead is that it continues to deliver drug therapies that perform and are in high demand. Wall Street recognizes this — hence the wave of buying and subsequent high relative strength rank. 

In fact, Gilead’s combination of strong RS and outstanding fundamentals earned it a score of 185 out of a possible 200 on a little-known indicator called the Alpha Score, which predicted some of 2014’s biggest winners.

This score puts GILD in the top seventh percentile not just of biotech stocks, but of all stocks in the market over the past six months. This is no small feat.

So far in 2014, the Alpha Score identified the 7th, 9th, 11th and 16th best-performing stocks — and generated an average gain of 109% on those positions. It also pegged 29 stocks right before they made double-digit percentage jumps within a month. So you can understand why I’m extremely bullish on GILD. This biotech stock should have no problem running 20% or more over the next six months.

If you want to learn more about the Alpha Score, I invite you to read our new report. In it, you’ll get the name of a stock it’s predicting to be a top performer in the next 12 months. This report will only be available for a few days, so click here now.