The S&P 500 is quietly having a great year.

Despite recent volatility, the index has delivered a total return of 6.6% in 2016 – putting it on pace for a 12% return this year.

While that looks like great news on the surface, it’s actually creating a problem.

The leading index is expensive.

Its P/E ratio of 20 is the highest in five years. Take a look below.

That higher valuation has a lot of investors searching for a bargain. I’ve got the answer to one of the best pharmaceutical stocks to buy. 

Gilead Sciences, Inc. (Nasdaq: GILD) is one of the largest and well-known pharmaceutical companies in the world.

A few years back, Gilead was one of the hottest stocks in the S&P 500 and big pharma industry. Its share price was up more than 500% from 2012 to 2015.

But for the last year Gilead’s share price has struggled, falling more than 25% and recently hitting a multi-year low.

That decline has been driven by weakness in Gilead’s Hepatitis C drug sales. This suite of drugs is responsible for almost half company revenue.

#-ad_banner-#That was great when sales were growing at a brisk pace. But in 2016, Gilead’s Hepatitis C drug sales have faltered.

In July Gilead reported second-quarter Hepatitis C drug sales of $3.92 billion, down 33% from the same period last year due to generic competition, slow patient growth and higher rebates. Gilead also cut its full-year revenue forecast by $500 million.

The news has been weighing on enthusiasm for Gilead. That’s why shares are down 25% in the last year. However, this is creating a great opportunity. This reaction is over blown. Gilead is one of the most undervalued stocks in the S&P 500. In the long run I see four reasons why Gilead will grow through its current setbacks. 

Gilead Has The Fastest Growing HIV Drug In The World
Gilead isn’t a one-trick pony with it Hepatitis C drugs.  The company is also one of the biggest players in the global HIV drug market. At the end of 2015 Gilead owned 85% of the U.S. HIV drug market.

I expect Gilead’s HIV drug sales to double by 2020 as it launches new drugs, more affordable prescriptions and enters new markets.

For example, in February Gilead added to its HIV drug lineup with the launch of Genvoya. With millions of people across the planet in dire need of for more affordable HIV drugs, Genvoya is off to a great start. Within six months of its release it became the most prescribed HIV drug for patients new to treatment and for those switching from another medication.

Second-quarter sales of $302 million were up 91% from the first quarter.

Additionally, in March Gilead received FDA approval for Odefsy, another HIV drug that is expected to reach annual sales of $1.6 billion in 2020.

Gilead Has An Outstanding Pipeline Of Drugs
Navigating generic competition and the patent cliff is par for the course for the world’s largest and most powerful pharmaceutical companies. That includes Gilead, which invests billions of dollars every year into developing new drugs.

Today, it has one of the most developed and promising pipelines in the pharmaceutical industry, with 180 trials currently underway. More than 60 of those are in phase 3, meaning they could be on the market soon. Gilead’s pipeline is projected to bring in around $32 billion in annual sales.

The strength of Gilead’s HIV drugs and its growing pipeline will help counter weakness in Hepatitis C drug sales.

The drop in Gilead’s share price is also a great opportunity for investors who like dividends. Gilead’s current yield just hit a new 52-week high of 2.3%. That is 11% better than the S&P 500 and ranks higher than 74% of its industry peers.

The Selloff Is Overdone, Gilead Is On Sale
The selloff in Gilead is way overdone. Shares have fallen much further than revenue and net income, making Gilead one of the most undervalued stocks in the S&P 500.

Despite some weakness in its Hepatitis C drugs, Gilead’s revenue and net income are still up huge in the last five years, and near a record high. Take a look below.

As you can see, shares have fallen a lot further than revenue and net income.

That divergence has Gilead trading at a huge discount to historical and industry averages and the S&P 500.

 Its P/E ratio of 7, is an 85% discount to the industry average of 45 and the S&P 500s 20.

That makes Gilead one of the most undervalued stocks in the S&P 500 and pharmaceutical industry.

It also makes Gilead an attractive buyout target.

2016 has been another strong year for big pharma M&A, with three deals valued at more than $45 billion. The industry’s biggest players such as Pfizer (NYSE: PFE) are searching for ways to grow revenue and cut expenses and buying a smaller rival is the perfect way to achieve that goal.

Risk To Consider: Gilead needs to work hard to protect its market share in Hepatitis C drugs. Further revenue erosion will weigh on shares.

Action To Take: Focus on the brand and the big picture with Gilead. Don’t worry about buying the exact low. Buy shares now while they are trading at a large discount to the industry average and wait for the rebound.

Editor’s Note: Gilead may be making advances in healthcare, but there are threats you need to worry about today. Right now, a deadly pandemic is spreading in our hospitals. The publicized death toll is 98,000 per year. But the real story is surfacing. It may be as high as 440,000 — the equivalent of two 747s crashing every day, or a 9-11 happening every two days. Yet, almost no one is saying a word. Full story here.