Valuation Dashboard: Healthcare - Update

| About: Health Care (XLV)

Summary

4 key fundamental factors across industries in the Healthcare sector.

A valuation status relative to history.

A reference for picking stocks in each industry.

This article series provides a dashboard of industries in each sector of the GICS classification. It starts with a visual status of valuation and quality factors relative to their historical averages. Then, it gives a list of stocks among the best of their industries according to the same factors. The methodology and all the numbers are given at the end of the article. Click "Follow" at the top of this page if you want to be notified of monthly updates.

Valuation and Quality indicators in Healthcare on 7/8/2016

The following charts give an idea of the current status of 3 valuation factors (P/E, P/S, P/FCF) and a quality factor (ROE) relative to their historical average in each industry. For all factors the difference to average is calculated in the direction where positive is good. For valuation ratios lower is better, for ROE higher is better. On the charts below higher is always better. Refer to the appendix for the detailed data and methodology.

Price/Earnings relative to historical average:

Price/Sales relative to historical average:

Price/Free Cash Flow relative to historical average:

ROE relative to historical average:

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

Interpretation

XLV and XPH have outperformed SPY respectively by about 3.8% and 2.2% in the last 3 months. IBB has underperformed the benchmark by about 3.3%. The five best performers among S&P 500 Healthcare stocks on this period are Bard C.R. Inc (NYSE:BCR), Boston Scientific Corp (NYSE:BSX), McKesson Corp (NYSE:MCK), Medtronic PLC (NYSE:MDT), St. Jude Medical Inc. (NYSE:STJ). All of them except MCK have hit an all-time high in July, STJ because of an acquisition offer by Abbot (NYSE:ABT).

Since last month:

  • P/E has worsened in Healthcare Technology and is stable elsewhere.
  • P/S has improved in Life Sciences Tools&Services, is stable in Biotechnology, and deteriorated elsewhere.
  • P/FCF has improved in Biotech, is stable in Pharma, and deteriorated elsewhere.
  • ROE has improved in Life Sciences Tools&Services, Biotech, Healthcare Equipment, and deteriorated a bit in Pharma.

Life Science Tools & Services is the most attractive group, close to fair value for all valuation factors and above the baseline in quality. Biotechnology looks reasonably priced, with mixed valuation factors and very close to the historical average ROE. Other industries are much less attractive. The worst are Healthcare Technology and Equipment & Supplies, with all factors below the baseline. Despite a good P/FCF, the Pharma industry looks overpriced and has the worst quality factor.

List of stocks to consider

(see methodology in the appendix)

ABBV

AbbVie Inc

BIOTECH

ABC

AmerisourceBergen Corp

HCAREPROVID

AKRX

Akorn Inc

PHARMA

AMGN

Amgen Inc

BIOTECH

BIIB

Biogen Inc

BIOTECH

CRL

Charles River Laboratories Intl

MEDEQUIP

GILD

Gilead Sciences Inc

BIOTECH

MCK

McKesson Corp

HCAREPROVID

UTHR

United Therapeutics Corp

BIOTECH

VAR

Varian Medical Systems Inc

HCAREEQSUPP

Click to enlarge

Appendix

Dashboard methodology:

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price to sales (P/S), Price to free cash flow (P/FCF), Return on Equity (ROE). My choice has been justified here and here. Their calculation aims at limiting the influence of outliers and large caps. They are reference values for stock picking, not for capital-weighted indices.

For each factor I calculate the difference with its own historical average: to the average for valuation ratios, from the average for ROE, so that the higher is always the better. The difference is measured in percentage for valuation ratios, not for ROE (already in percentage).

The next table reports the 4 industry factors. There are 3 columns for each factor: the current value, the average ("Avg") between January 1999 and October 2015 taken as an arbitrary reference of fair valuation, and the difference explained above ("D-xxx").

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

38.48

27.18

-41.57%

3.76

3.18

-18.24%

44

30.51

-44.22%

-28.26

-12.14

-16.12

HC Providers&Services

24.59

20.88

-17.77%

1.01

0.85

-18.82%

19.39

17.75

-9.24%

9.52

5.78

3.74

HC Technology*

85.36

56.13

-52.08%

3.91

3.39

-15.34%

40.15

35.77

-12.24%

-8.74

-6.2

-2.54

Biotechnology

34.5

39.78

13.27%

34.63

29.01

-19.37%

35.27

43.74

19.36%

-66.52

-64.42

-2.1

Pharmaceuticals

32.34

26.26

-23.15%

17.12

8.25

-107.52%

21.25

32.55

34.72%

-46.84

-30.3

-16.54

Life Sciences Tools&Services*

27.91

29.52

5.45%

3.11

3.39

8.26%

29.7

27.28

-8.87%

-1.43

-18.37

16.94

Click to enlarge

* Averages since 2006

Stock list methodology:

The stocks listed above are in the S&P 1500 index, cheaper than their respective industry factor for Price/Earnings, Price/Sales and Price/Free Cash Flow. The 10 companies with the highest Return on Equity are kept in the final selection.

This strategy 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.

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Disclosure: I am/we are long AKRX,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.