Best And Worst Funds: Healthcare Sector

 |  Includes: BBH, BMRN, JNJ, XLV
by: David Trainer

The healthcare sec­tor ranks third out of the ten major sec­tors as detailed in our sec­tor roadmap. It gets my Neu­tral rat­ing, which, like my fund rat­ings, is based on aggre­ga­tion of stock rat­ings for each of the com­pa­nies in the sec­tor. The prof­itabil­ity and val­u­a­tion of this sec­tor, how­ever, are not quite as good as the Tech­nol­ogy and Con­sumer Sta­ples sec­tors, which get my Attrac­tive rat­ing as per pre­vi­ous arti­cles.

Nev­er­the­less, healthcare is one of the most defen­sive sec­tors. Every­one needs healthcare at some point in life, and demand for healthcare is not closely linked to eco­nomic con­di­tions. If any­thing, a poor econ­omy is likely to make peo­ple feel sick.

There are 108 funds to chose from within the healthcare sec­tor, and they are all very dif­fer­ent. Per Fig­ure 1, the num­ber of hold­ing varies widely (from 20 to 299), which cre­ates dras­ti­cally dif­fer­ent invest­ment impli­ca­tions and rat­ings.

How do investors pick the right fund out of the sea of choices that will deliver the best returns?

Fig­ure 1: Funds with Most & Least Hold­ings - Top 5

(Click to enlarge)

Sources: New Con­structs, LLC and com­pany filings

To iden­tify the best funds within a given cat­e­gory, investors need a pre­dic­tive rat­ing based on analy­sis of the under­ly­ing qual­ity of stocks in each fund. See Figure 2.

Our pre­dic­tive fund rat­ings are based on aggre­gat­ing our stock rat­ings on each of the fund's hold­ings and all of the fund's expenses. Investors deserve forward-looking fund research that is com­pa­ra­ble in qual­ity to stock research.

Investors should not rely on backward-looking research of past per­for­mance for invest­ment decisions.

Fig­ure 2 shows the five best and worst-rated funds for the sec­tor. The best funds allo­cate more value to Attractive-or-better-rated stocks than the worst funds and vice versa. In addi­tion, my rat­ings account for the total annual cost of invest­ing in a fund or ETF.

One of my favorite stocks in the healthcare sec­tor is John­son& John­son (NYSE:JNJ), which gets my Very Attrac­tive rat­ing. I also like the fund that makes the largest allo­ca­tion to JNJ, Heath Care Select Sec­tor SPDR (NYSEARCA:XLV). JNJ is one of those stocks even a mother can love. It is reli­able, prof­itable and cheap. I an envi­ron­ment where so many investors are look­ing for the quick an easy route to riches, JNJ may be over­looked. Value investors should stock up.

One of my least favorite healthcare stocks is Bio­Marin Phar­ma­ceu­ti­cals (NASDAQ:BMRN), which gets my Very Dan­ger­ous rat­ing. I also rec­om­mend investors steer away from the fund that allo­cates the most value to BMRN, Mar­ket Vec­tors Biotech ETF (NYSEARCA:BBH). BMRN is bad invest­ment because the com­pany is not as prof­itable as it appears and the stock is expen­sive. Over the last ten years, man­age­ment has writ­ten of over 12 cents for every dol­lar of equity cap­i­tal on the bal­ance sheet. Not exactly inspir­ing per­for­mance. The stock's cur­rent val­u­a­tion seems to ignore that issue. At nearly $36/share, the stock implies the com­pany will grow prof­its at 20% com­pounded annual for over 40 years. For investors to make money buy­ing the stock at cur­rent lev­els, expec­ta­tions for future cash flows will have to rise above the cur­rent nose­bleed level. Not a good bet.

Fig­ure 2: Funds with the Best & Worst Rat­ings - Top 5

* MF des­ig­nates Mutual Funds and ETF des­ig­nates Exchange-Traded Funds

* Analy­sis uses the top-ranked or worst-ranked class for each fund

Sources: New Con­structs, LLC and com­pany filings

Investors need to tread care­fully when con­sid­er­ing healthcare funds as most are not worth buy­ing. Only 6 of the 108 funds for the sec­tor allo­cate enough value to Attractive-or-better-rated stocks to earn an Attrac­tive over­all rat­ing. In addi­tion to the four above, ICHEX and VGHCX also get an Attrac­tive rat­ing. We do not show them because they are another class of a more highly-ranked fund. Fig­ure 3 shows the rat­ing land­scape of all ETFs and mutual funds in the healthcare sector.

Our Sec­tor Roadmap report ranks all sec­tors and high­lights those that offer the best investments.

Fig­ure 3: Sep­a­rat­ing the Best Funds From the Worst

Sources: New Con­structs, LLC and com­pany filings

Fig­ure 4 offers addi­tional details on the qual­ity of funds in the sec­tor. Of par­tic­u­lar note, the 6 Attractive-rated funds in this sec­tor hold over 55% of the assets allo­cated to the sector.

Fig­ure 4: healthcare Fund Land­scape Details

(Click to enlarge)

Sources: New Con­structs, LLC and com­pany filings

Fig­ure 5 lists our Pre­dic­tive Fund Rat­ing for the 5 largest and most pop­u­lar healthcare funds.

Fig­ure 5: Five Largest healthcare Funds

* MF des­ig­nates Mutual Funds and ETF des­ig­nates Exchange-Traded Funds

* Analy­sis uses the top-ranked class for each fund

Sources: New Con­structs, LLC and com­pany filings

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: I am not removing the duplicate language as requested because these reports are not to be read by the same person every time. Each report should stand on its own.Where is the ticker box for adding tickers? I do not see that in your new system.The images may be small, but they are legible. Several other articles with the same size images have been published by you. In fact, my articles on Best & Worst Funds for the technology, Consumer Disc, Consumer Staples and Industrials have all been published already without any changes by me.