Fed Chairman Powell spoke this week. This struck me as a notable shift from him: “Indicators of wage growth show a gradual decline toward levels that would be consistent with 2% inflation over time.” The Fed’s interest rate increases are over, although they will continue to shrink their balance sheet. Gilead Sciences (GILD) is a nice long-term buy here, suggests Michael Murphy, editor of New World Investor.

Powell didn’t even mention core services ex-housing – the Fed’s proxy for concerns about wages sustaining higher services prices. He also said: “There are very many signs that the labor market is getting more balanced” and “By so many measures, the labor market is gradually cooling” and at the margin, the Treasury yield rise could mean less need to raise the Fed funds rate further.

Speaking of which, the 10-year Treasury yield just hit 4.99%, its highest level since 2007 – 16 years. Hedge Funds also continue adding to their short Treasuries futures position that now has reached the largest short position in history. Crowded trades rarely work out.

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As for stocks, the S&P 500 was recently down 1.6% in a week. In all odd years in the last 22 years, the S&P made the seasonal August-October low by October 13 at the latest. The last time it bottomed later was in 1999 when it bottomed on October 18. This means that the drops this week are likely to be only pullbacks in an uptrend. The Index is up about 11% year-to-date.

Meanwhile, GILD began a new Phase 2 clinical trial in Europe to evaluate lenacapavir as a twice-yearly HIV prevention option in people who could benefit from HIV pre-exposure prophylaxis (PrEP) in France and the United Kingdom. In Europe in 2022, more than 100,000 people were newly diagnosed with HIV. Less than 15% of people in Europe who could benefit from PrEP are accessing PrEP options.

In a recent SeekingAlpha article called Gilead Sciences Stock Is Cheap, With Broad Pipeline, the author wrote: “GILD is dirt cheap despite its broad pipeline, solid profitability (EBITDA margin is quite solid), and low valuation multiples (~30% lower than the sector’s medians). Usually, Gilead Sciences doesn’t have both the current high dividend yield and such a significant FCF yield it has today, adding to the argument for its current undervaluation.” I agree.

Recommended Action: Buy GILD.

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