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Why You're Right to Invest in Gilead Sciences Stock

IBB Chart

With the Dow Jones Industrial Averageblasting through the 20,000 mark , many stocks are currently trading at or near their all-time highs. Unfortunately, biotechnology investors have largely been left out of the rally. The iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) is in the red over the past year, and a few individual companies -- such as Gilead Sciences (NASDAQ: GILD) -- have performed far worse than that.

IBB data by YCharts

Gilead's stock has been in free-fall over concerns that the company's best days are behind it. However, a few Motley Fool healthcare contributors do not agree with that assessment at all. Read on to find out why they plan on hanging on to their shares of Gilead Sciences for the foreseeable future.

Profit lurking in its pipeline

Todd Campbell : I'm not going to sugar-coat it; it's been a horrific year for Gilead Sciences' shareholders. The stock has tumbled in the wake of decelerating hepatitis C sales and trial failures that include the shuttering of trials on its once-promising leukemia drug, Zydelig.

However, investors might not want to focus too much attention on the company's past stumbles, because other drugs are quietly progressing through the company's pipeline that could be multibillion-dollar blockbusters.

GILD PE Ratio (TTM) Chart

GILD PE Ratio (TTM) data by YCharts .

I think the most interesting figure on this chart is the company's price to free-cash-flow ratio. Over the past 12 months, Gilead has cranked out more than $17 billion in free cash flow, and yet the company's current market cap is only $94 billion. Those figures suggest that the company could theoretically buy back all of its outstanding shares in less than six years' time! Or, put another way, if Gilead paid out 100% of its free cash flow as a dividend, its yield would be 18% !

If Gilead was in danger of collapsing, these metrics would make sense. However, the company continues to crank out cash flow, invest in its future, and return cash to shareholders through buybacks and dividends. While the company's near-term growth prospects do not look great, this is hardly a company in danger of falling apart.

While I won't advocate that Gilead Sciences is my favorite investing idea at the moment, I do think this company's shares are so cheap that the smart play is to hang on.

Ready to make a deal

Keith Speights : For those who think Gilead's future looks dim, remember that the biotech's stock nearly tripled over the past five years primarily because of an acquisition. Back in November 2011, Gilead bought Pharmasset for $11 billion, picking up the hepatitis C virus (HCV) drug later to be known as Sovaldi. Combinations of Sovaldi with other drugs led to the successful commercial launches of two other HCV drugs, Harvoni and Epclusa.

Gilead has more money -- and more motivation -- to make a game-changing acquisition than it did a little over five years ago. The biotech reported $31.6 billion in cash, cash equivalents, and marketable securities at the end of the third quarter of 2016. With its strong operating cash flow, Gilead undoubtedly has more than that now.

CEO John Milligan has publicly stated that the company is focused on "augmenting [its] portfolio with external opportunities, particularly in the field of oncology." However, Milligan didn't limit Gilead's acquisition prospects to only oncology.

I don't expect the biotech to merely throw money at an acquisition in the hopes that it pays off; Gilead's management team is too disciplined to make a rash decision. However, it won't surprise me if Gilead makes one or more deals in 2017 that pay off for investors over the long run.

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Brian Feroldi owns shares of Gilead Sciences. Keith Speights owns shares of Gilead Sciences. Todd Campbell owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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