Valuation Dashboard: Healthcare - Update

| About: Health Care (XLV)

Summary

Valuation metrics in the Healthcare sector.

Evolution since last month.

A list of stocks are looking cheap in their industries.

This article series provides a monthly dashboard of industries in every sector. It compares valuation and quality factors relative to their historical averages in each industry and gives a list of 10 stocks. I update every month 8 lists like this one covering all sectors (some sectors are grouped). The 8 lists together have returned about 25% in 2016. If you want to stay informed of updates, click "Follow" at the top of this page. My Marketplace Subscribers have early access to the stock lists before they are published in free-access articles.

Executive summary

Biotechnology is underpriced relative to its own historical average in 2 major valuation factors: Price/Earnings (P/E) and Price/Free Cash Flow (P/FCF). Its Return on Equity (ROE) is also above the baseline. Life Science Tools/Services are very close to fair value for 3 major valuation metrics and above the historical average in ROE. Healthcare Providers/Services is not far behind in valuation and quality. Other groups are much less appealing. The Pharmaceutical industry is close to the baseline in P/E and P/FCF, but much worse regarding Price/Sales (P/S) and ROE. The only healthcare industry segment with all my metrics below the baseline is Healthcare Equipment.

Since last month:

  • P/E has improved in Biotechnology, Healthcare Technology and deteriorated a bit in other industries.
  • P/S has improved in Healthcare Technology and deteriorated in other industries.
  • P/FCF has improved in Biotechnology and Healthcare Equipment, is stable in Pharma and has deteriorated elsewhere.
  • ROE has improved in Pharma, Life Sciences Tools and is stable elsewhere.
  • In one month, the SPDR Select Sector Healthcare ETF (NYSEARCA:XLV) has outperformed SPY by 3.5%, the Pharmaceuticals ETF (NYSEARCA:XPH) and the Biotechnology ETF (NYSEARCA:XBI) by 5%.
  • The five best performers among S&P 500 Healthcare stocks on this period are Allergan PLC (NYSE:AGN), Alexion Pharmaceuticals Inc. (NASDAQ:ALXN), Edwards Lifesciences Corp. (NYSE:EW), Illumina Inc. (NASDAQ:ILMN) and Eli Lilly and Co. (NYSE:LLY).

Some cheap stocks in their industries

The stocks listed below 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% for a 17-year backtest. The sector ETF, XLV, has an annualized return of only 7.73% on the same period. Past performance is not a guarantee of future result. This is not investment advice. Do your own research before buying.

ABBV

AbbVie Inc.

BIOTECH

ABC

AmerisourceBergen Corp.

HCAREPROVID

AMGN

Amgen Inc.

BIOTECH

BIIB

Biogen Inc.

BIOTECH

CAH

Cardinal Health Inc.

HCAREPROVID

GILD

Gilead Sciences Inc.

BIOTECH

MCK

McKesson Corp.

HCAREPROVID

PRXL

PAREXEL International Corp.

MEDEQUIP

UTHR

United Therapeutics Corp.

BIOTECH

VAR

Varian Medical Systems Inc.

HCAREEQSUPP

Detail of Valuation and Quality indicators in Healthcare on 1/9/2017

I take 4 aggregate industry factors provided by portfolio123: Price/Earnings (P/E), Price/Sales (P/S), Price/Free Cash Flow (P/FCF) and 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

40.78

27.18

-50.04%

4.08

3.18

-28.30%

37.41

30.51

-22.62%

-34.69

-12.14

-22.55

HC Providers/Services

23.66

20.88

-13.31%

0.99

0.85

-16.47%

18.49

17.75

-4.17%

7.4

5.78

1.62

HC Technology*

82.89

56.13

-47.68%

3.12

3.39

7.96%

35.51

35.77

0.73%

-14.63

-6.2

-8.43

Biotechnology

29.74

39.78

25.24%

35.34

29.01

-21.82%

35.72

43.74

18.34%

-67.46

-64.42

-3.04

Pharmaceuticals

29.04

26.26

-10.59%

17.57

8.25

-112.97%

30.5

32.55

6.30%

-59.87

-30.3

-29.57

Life Sciences Tools&Services*

31.79

29.52

-7.69%

3.14

3.39

7.37%

27.96

27.28

-2.49%

-9.15

-18.37

9.22

* Averages since 2006

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.

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 XLV, XPH and IBB with SPY in a one-month period.

If you want to stay informed of my updates on this topic and other articles, click the "Follow" tab at the top of this article.

Data provided by portfolio123 (this is a partner link giving you an extended period of free trial. I may receive a fee if you buy a paid subscription later, at no additional cost to you).

Disclosure: I am/we are long GILD,SPY,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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500.
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here