Healthcare Sector Dashboard- Update

| About: Health Care (XLV)

Summary

4 key factors are reported across industries in the Healthcare sector.

They give a valuation status relative to history.

They give a reference for picking stocks in each industry.

Click to enlarge

This monthly series of articles provides a valuation dashboard in sectors and industries. I follow up a certain number of fundamental factors and compare them to historical averages. This article covers Healthcare. The choice of the fundamental ratios used in this study has been justified here and here. You can find in this article numbers that may be useful in a top-down approach. There is no analysis of individual stocks. A list of stocks to consider is provided in the conclusion.

Methodology

  • Four industry factors calculated by portfolio123 are extracted from the database: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE).
  • They are compared with their own historical averages "Avg". The difference is measured in percentage for valuation ratios and in absolute for ROE, and named "D-xxx" if xxx is the factor's name. For example, D-P/E = (AvgP/E - P/E)/AvgP/E. It can be interpreted as a percentage in under-pricing relative to a historical baseline: the higher, the better. It points to over-pricing when negative. ROE is already a percentage. That's why we take the simple difference: D-ROE = ROE - AvgROE.

The industry factors are proprietary data from the platform. The calculation aims at eliminating extreme values and limiting the influence of the largest companies. These factors are not representative of capital-weighted indices. They are useful as reference values for picking stocks in an industry, not for ETF investors.

Industry valuation table on 1/26/2016

The next table reports the 4 industry factors. For each factor, the next "Avg" column gives its average between January 1999 and October 2015, taken as an arbitrary reference of fair valuation. The next "D-xxx" column is the difference as explained above. So there are 3 columns for each ratio.

P/E

Avg

D- P/E

P/S

Avg

D- P/S

P/FCF

Avg

D- P/FCF

ROE

Avg

D-ROE

HC Equipment&Supplies

32.32

27.18

-18.91%

3.48

3.18

-9.43%

43.51

30.51

-42.61%

-28.97

-12.14

-16.83

HC Providers&Services

24.77

20.88

-18.63%

1.01

0.85

-18.82%

20.65

17.75

-16.34%

8.38

5.78

2.6

HC Technology*

43.78

56.13

22.00%

3.7

3.39

-9.14%

32.69

35.77

8.61%

-10.83

-6.2

-4.63

Biotechnology

22.79

39.78

42.71%

33.36

29.01

-14.99%

38.48

43.74

12.03%

-61.56

-64.42

2.86

Pharmaceuticals

34.79

26.26

-32.48%

14.68

8.25

-77.94%

23.41

32.55

28.08%

-39.35

-30.3

-9.05

Life Sciences Tools&Services*

30.87

29.52

-4.57%

2.72

3.39

19.76%

30

27.28

-9.97%

-11.91

-18.37

6.46

Click to enlarge

* Averages since 2006

Valuation

The following charts give an idea of the current status of industries relative to their historical average. In all cases, the higher the better.

Price/Earnings:

Price/Sales:

Price/Free Cash Flow:

Quality (ROE)

Relative Momentum

The next chart compares the price action of the SPDR Select Sector ETF (XLV) with SPY (chart from freestockcharts.com). It includes also a biotechnology ETF (IBB) and a pharmaceutical one (XPH) as industry benchmarks.

Click to enlarge

Conclusion

XLV has outperformed SPY by about 6% in the last 3 months. XPH has done a bit less, and IBB has underperformed by more than 3%. The five best performers among S&P 500 Healthcare stocks on this period are Allergan PLC (NYSE:AGN), Baxalta Inc (NYSE:BXLT), Illumina Inc (NASDAQ:ILMN), Intuitive Surgical Inc (NASDAQ:ISRG), Mylan (NASDAQ:MYL). Two are in generic drugs and two in biotechnology.

Since last month, all valuation factors have improved with prices going down. Quality has worsened a bit for Biotech and Pharma. It has improved or is stable for other industries. Biotechnology looks the most attractive industry of the sector, with 3 factors out of 4 better than historical averages. The worst is Healthcare Equipment and Supplies, with all factors in negative territory.

There may be quality stocks at a reasonable price in any industry. To check them out, you can compare individual fundamental factors to the industry factors provided in the table. The next table shows a list of stocks in the Healthcare sector. They are all cheaper than their respective industry for the 3 valuation factors simultaneously: Price/Earnings, Price/Sales, Price/Free Cash Flow. Then they are selected for their higher Return on Equity.

This screen updated and rebalanced monthly has an annualized return about 22.34% and a drawdown about -62% for a 17-year backtest. The sector ETF XLV has an annualized return of only 7.73% on the same period. Past performance, real or simulated, is not a guarantee of future return. To avoid large drawdowns shown by historical data, this list may be considered an entry point for further due diligence, or as a portfolio after adding a few trading rules and market timing. This is not investment advice. Do your own research before buying.

AMGN

Amgen Inc

BIOTECH

ANIP

ANI Pharmaceuticals Inc

PHARMA

BIIB

Biogen Inc

BIOTECH

ENTA

Enanta Pharmaceuticals Inc

BIOTECH

GILD

Gilead Sciences Inc

BIOTECH

LCI

Lannett Co Inc.

PHARMA

MCK

McKesson Corp

HCAREPROVID

STJ

St. Jude Medical Inc.

HCAREEQSUPP

UTHR

United Therapeutics Corp

BIOTECH

VAR

Varian Medical Systems Inc

HCAREEQSUPP

Click to enlarge

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Disclosure: I am/we are long GILD, STJ, UTHR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.